The Employee Retirement Income Security Act of 1974 (ERISA) regulates most private employee benefit retirement and welfare plans. This statute’s purview is vast; it governs employer-sponsored defined benefit and defined contribution retirement plans and an array of welfare plans.

Under ERISA, a plan fiduciary is an entity that exercises authority or control over the management or disposition of plan assets. Within the ERISA context, “fiduciary” is a functional title rather than a job title. A fiduciary need not know that they have assumed fiduciary status to be liable for a potential fiduciary breach. If one fiduciary fails to meet their responsibilities, other fiduciaries may be held accountable, even if they were not directly involved. This is known as “joint and several liability.”

What are a fiduciary’s obligations under ERISA?

ERISA Section 404 and Section 2550.404a-1 of the Department of Labor’s regulations outline fiduciary obligations. The provisions demand that a fiduciary:

  • Act solely in the interest of the participants and beneficiaries, exclusively to provide benefits to them and defray reasonable expenses of the plan.
  • Carry out their duties prudently.  
  • Follow the plan documents, except where the plan document conflicts with ERISA.
  • Diversify plan investments to minimize the risk of significant losses.
  • Pay only reasonable plan expenses.

How can a plan fiduciary ensure it is fulfilling its obligations?

  • Differentiate between “fiduciary” and “settlor” functions. Not all functions related to employee benefit plans are fiduciary functions. Fiduciaries must carry out their duties in the best interests of plan participants. The administration of the plan is generally a fiduciary function. Settlor functions, in contrast, may be carried out in the best interests of the plan sponsor and may include adopting, amending, or terminating a benefits plan.
  • Manage plan administration using well-documented, rigorous decision-making processes. The fiduciary duty of prudence is a process requirement. The fiduciary does not have a duty to maximize plan asset growth or minimize plan expenses absolutely. Instead, the fiduciary has the duty to administer the plan using reasonable, rational decision-making processes. “Prudent” processes cited in recent cases include reviewing quarterly reports, engaging an investment consultant, using a watch list and investment policy statement in decision-making, and actively monitoring underperforming funds.
  • Follow the plan’s terms—and design the plan to make that possible. If a provision is written into the plan and does not conflict with ERISA, the fiduciary is bound to follow the terms of each such provision to remain in compliance. 

The Bottom Line

  • The role of a fiduciary under ERISA is both critical and complex. Fiduciaries are responsible for managing the plan’s assets and safeguarding the interests of the participants and beneficiaries. While the path to compliance with ERISA’s fiduciary obligations may seem daunting, it is based on loyalty, prudence, and adherence to the plan’s terms. By understanding and respecting these principles, fiduciaries can navigate their responsibilities.
  • The essence of fiduciary duty under ERISA is about making informed, well-considered decisions that align with the best interests of the plan participants and beneficiaries.

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

During the next several weeks, we will publish a series of articles that dive deeply into “health plan hygiene” relating to health and welfare benefit plan fiduciary issues and how employers can protect themselves in this quickly evolving area.

Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA) requires certain disclosures regarding employee benefit plan fees.  When this so-called fee disclosure rule was put in place for retirement plans, it sparked litigation regarding whether the fees paid by defined contribution retirement plans for recordkeeping, plan administration, and investment management are too high.  These cases have included claims of ERISA fiduciary breaches and prohibited transactions and have plagued the retirement plan industry for the last two decades.

The disclosure rule was expanded by the Consolidated Appropriations Act of 2021 to apply to welfare plans, and several notable cases have already been filed against welfare benefit plan sponsors. These recent cases have included claims that the benefits committees have been imprudent in their plan design, have overpaid for benefits, have set their premiums too high because of commissions being paid to brokers, have improperly retained rebates, and have had a conflict of interest when selecting plan partners.

Note that while there is no law requiring employers to sponsor a retirement plan for their employees, the same is not necessarily true for welfare benefits. Under the Affordable Care Act, certain large employers are required to offer medical insurance to full-time employees or risk a penalty from the Internal Revenue Service.  As a result, employers who offer group health insurance will be at risk for claims regarding these benefits and services and cannot protect themselves by simply not offering the benefit.

Now is the time for plan fiduciaries to protect themselves from potential claims by revisiting their fiduciary practices as they apply to health and welfare plan administration.  

Check our blog regularly for more information on this topic.  In the meantime, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Of interest to 401(k) plan sponsors and administrators, the IRS recently issued Notice 2024-55, providing guidance on SECURE 2.0’s new exceptions—effective January 1, 2024—to the additional 10% tax on early qualified retirement plan distributions for emergency personal expenses and victims of domestic abuse.  Both types of distributions are optional and may be adopted through discretionary plan amendments. 

Emergency personal expense distributions are those made to an individual to meet unforeseeable or immediate financial needs relating to necessary personal or family expenses.  Participants are limited to one emergency personal expense distribution per calendar year, and the distribution cannot exceed $1,000 (not indexed for inflation) or, if less, the excess of the participant’s vested account balance.  In addition, once an emergency personal expense distribution is taken, the participant cannot take another emergency personal expense distribution during the following 3 calendar years unless the previous distribution has been repaid or the participant’s contributions to the plan at least equal the amount of the unpaid distribution.      

Domestic abuse victim distributions are those made to a domestic abuse victim during the 1-year period beginning on the date the individual is a victim of domestic abuse by a spouse or domestic partner.  “Domestic abuse” is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim or to undermine the victim’s ability to reason independently, including by means of abusing the victim’s child or another family member living in the household.  Domestic abuse victim distributions are limited to $10,000 (indexed for inflation) or, if less, 50% of the participant’s account balance.

Plan sponsors can rely on a participant’s written certification that the distribution is due to an emergency personal expense or being the victim of domestic abuse.  In addition, a participant must be allowed to repay any emergency personal expense or domestic abuse victim distribution during the 3-year period following the date the distribution was received if the participant is eligible to make rollover contributions.  Finally, such distributions are not treated as eligible rollover distributions, and Code Section 402(f) notices and 20% mandatory income tax withholding are not required.

The IRS has invited comments on all the matters discussed in the Notice, including whether exceptions should be created to plan sponsor reliance on participant certification and whether procedures to address employee misrepresentations should be included.

We are available to help plan sponsors understand and implement SECURE 2.0’s requirements.  If you have questions or need assistance, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

For the last 40 years, judges were required to defer to administrative agencies’ reasonable interpretations of ambiguous federal statutes under Chevron v. Natural Resources Defense Council. The Supreme Court upended that precedent in Friday’s 6-3 ruling in Loper Bright Enters. v. Raimondo, which overturned Chevron and instructs judges to rely on their own judgment in determining whether an agency’s regulation falls within its authority.  

Chevron’s repeal has both immediate and concrete impacts on ERISA’s interpretation, as well as the potential for significant, broader effects.  More…

When an employee is on an extended leave of absence, there is often confusion regarding whether and to what extent the employer must continue to provide coverage to the employee under the employer-provided health plan.  To determine whether coverage is required, the employer should consider the terms of the plan, COBRA requirements, and whether the leave is covered by FMLA. 

The Plan Terms.  Employer-provided health plans include continuing service requirements for continuing eligibility.  For example, it is common for a health plan to require employees to perform an average of at least 30 hours of service per week to be eligible for coverage under the plan.  When an employee goes out on a leave of absence, and the employee’s average hours of service typically fall below the minimum coverage requirement, the employee may no longer be eligible for coverage under the plan.   

FMLA Leave. Suppose an employer is subject to the Family and Medical Leave Act (FMLA). In that case, the employer must maintain group health benefits to employees on FMLA leave “on the same basis as coverage would have been provided” had the employee been employed throughout the leave period.  This means, for example, that if an employer pays a portion of the group health plan premiums for active employees, the employer must pay the same portion for employees on FMLA leave.  The obligation to continue active-employee coverage under FMLA terminates if the employee does not return to work at the end of the FMLA leave.   For this purpose, the “end of the FMLA leave” is generally the last scheduled day of the FMLA leave.  That said, if the employee “unequivocally” communicates to the employer that the employee does not intend to return to work before the last scheduled day of the FMLA leave, the end of the FMLA leave is the day that the employee communicates such intent.   

While active coverage terminates as of the last day of the FMLA leave, the employer may have an obligation to permit the employee to elect to continue coverage under COBRA following the end of the FMLA leave.

COBRA, Generally.  Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), an employee must be given the right to elect to continue coverage under an employer-provided health plan (at the employee’s expense) if the employee would otherwise lose coverage due to a “qualifying event.”  An employee’s termination of employment and reduction in hours are considered “qualifying events.”  So when an employee goes out on leave (i.e., the employee’s hours are reduced) and the leave causes the employee to lose coverage under the group health plan, the employee should be offered COBRA continuation coverage.  The end of an employee’s FMLA leave is also a COBRA qualifying event.  An employee who does not return to work and loses coverage as of the end of the employee’s FMLA leave should also be offered the opportunity to elect COBRA continuation coverage. 

Leave Policies.  Often, employers will let employees continue coverage under the employer-provided health plan during a leave of absence or after an FMLA leave, either because the employer is unclear about the coverage requirements or out of a desire to help the employee.  While generally well-intentioned, this practice could lead to an insurer’s refusal to cover the employee’s claims (or, in the case of a self-insured plan, the stop-loss carrier’s refusal to cover the employee’s claims).  In that case, the employer may be liable for all or some costs of the employee’s claims.  In addition, the employer may be penalized for failing to comply with COBRA requirements.  It is essential that employers review and understand the coverage requirements of the employer’s group health plan and implement written policies to properly administer the group health plan in connection with employee leaves of absence.   

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

A recent rash of class action lawsuits in California claim that using forfeitures to reduce future employer contributions to tax-qualified retirement plans runs afoul of the Employee Retirement Income Security Act (ERISA). These cases have continued to advance despite their central claim seeming to contradict long-standing Internal Revenue Service (IRS) guidance for the permitted use of plan forfeitures.  (Retirement plans are governed by both ERISA and the Internal Revenue Code (Code).)  Considering these developments, how can an employer best use the forfeiture dollars without risking exposure to litigation?

Background

Certain employer contributions to tax-qualified retirement plans may be subject to vesting requirements. When an employee separates from service with the employer before these contributions fully vest, the unvested contributions will be forfeited back to the plan. Forfeitures attributable to a plan year generally must be used before the end of the following plan year.

The use of plan forfeitures is subject to limits imposed by the Code. For example, the Code prevents forfeited contributions from being returned to the employer – they must stay in the plan to be used to benefit plan participants. Prior IRS guidance, along with the proposed regulations issued by the IRS in February 2023, indicates that employers may use forfeitures to offset future employer contributions, to pay for plan administrative expenses, and/or to provide additional contributions to participants. We discussed the IRS’s proposed regulations here. Yet recent lawsuits claim that plan fiduciaries violate ERISA when they choose to use forfeitures to offset employer contributions rather than allocating such forfeitures to plan participants or paying reasonable plan expenses.

The litigants allege that when an employer uses forfeitures to offset future employer contributions, it benefits the employer rather than the participants and that the plan cannot grow as large as it would if it had the benefit of both the forfeitures and future employer contributions. The former is an alleged breach of the duty of loyalty, which requires that the plan administrator act solely in the interest of the plan’s participants and beneficiaries. The latter is an alleged breach of the plan sponsor’s fiduciary duty, which litigants argue obligates the fiduciary to maximize asset growth. Further, by not applying forfeitures to the plan’s administrative costs, those costs may instead be borne by the plan participants, which is also an alleged breach of the duty of loyalty.

How can companies mitigate their litigation risk?

  • Ensure plan documents allow the use of forfeitures in the manner intended by the plan fiduciary. For example, if the employer wishes to maintain flexibility, the plan document should clearly state that forfeitures may be used for any of the above purposes. A case arising from forfeitures being used in accordance with the terms of the plan document is easier for an employer to defend.
  • Establish a policy outside the plan if the plan document provides discretion over the use of forfeitures. Employers may find that their plan document, particularly a pre-approved document that cannot be revised, allows the use of forfeitures for all three purposes but then provides discretion to the employer regarding the hierarchy of how forfeitures are used. An employer may wish to establish a separate policy outside the plan that memorializes the intended hierarchy for forfeiture use.
  • Establish a well-documented fiduciary review process. The fiduciary duty of prudence is a test of process.A well-documented and reasonable decision-making process offers a strong defense against forfeiture claims and other types of claims that may be brought against plan fiduciaries. In the forfeiture context, it means demonstrating an adherence to the plan terms and any standing policy/procedure regarding the order and use of forfeitures. 

The Jackson Lewis Employee Benefits Practice Group members continue to monitor developments in forfeiture-related cases and are here to help employers with questions on best practices for using forfeitures. Please contact a Practice Group member or the Jackson Lewis attorney with whom you regularly work for assistance.

The November 30, 2023, opinion of a New York administrative law judge in In the Matter of the Petition of Edward A. and Doris Zelinsky upholds the state’s so-called income tax “convenience rule” with an expanded legal rationale that New York employers with remote and hybrid employees outside of New York State will want to note. The case is now pending in the New York Tax Appeals Tribunal.

The convenience rule is an income-sourcing rule applicable to New York state income tax. According to current administrative guidance, days worked by a non-New York resident at home out of state are considered workdays in New York if

  • the employee’s “assigned or primary work location” is at an established office or other bona fide place of business of the employer in New York State; and
  • the employee performs the work outside of New York not because the employer’s business requires it but rather for the convenience of the parties, especially the employee.

New York is one of six states with similar versions of a convenience rule, but New York’s is arguably the most aggressively interpreted and enforced. In addition to double state income taxation of the employee on the same wages earned physically outside of New York, the rule often requires New York employers to withhold from the same wages both state income tax for the employee’s resident state and New York income tax. This is because most resident states in which the employee may be working for a New York employer do not grant a tax or wage withholding credit against the resident state’s required tax withholding for wages that are merely deemed to be worked in New York rather than earned while the employee is physically in New York.

In the post-pandemic world of rapidly increasing remote and hybrid employment, the employers most adversely affected by the New York convenience rule are those with no offices or facilities outside of New York. Such employers cannot plausibly reassign employees working in other states to an office in a state with no convenience rule.

The 26-page opinion addresses New York convenience rule taxation of wages from remote work performed in Connecticut, both before the pandemic (2019) and during the pandemic (2020), by a law professor at a New York City law school. Part of the opinion relates only to remote work in 2020 pursuant to pandemic work-from-home requirements. Moreover, some of the authorities and grounds, in the opinion, assume the nonresident employee works in New York for at least part of a tax year. However, much of the opinion’s reasoning would apply to the ongoing enforcement of the rule to withholding on wages of pure remote employees who are hired to work outside of New York exclusively and may never set foot in New York during a tax year.

In this regard, the opinion includes a rationale for the rule based on the 2018 U.S. Supreme Court sales tax “nexus” opinion in South Dakota v. Wayfair, Inc. Wayfair overturned prior precedent that required a business to have a physical presence in a state in order to have sufficient constitutional nexus for the state to impose sales taxes on the business. Relying on Wayfair, the judge stated that Professor Zelinsky’s use of Zoom classes and other Internet collaborative tools to connect him with his students gave him a “virtual” presence in New York that justified imposition of New York income tax on his wages earned while at his home in Connecticut.

New York’s convenience rule ultimately depends on the legal significance of the remote or hybrid employee’s deemed presence in the state; however, reliance on a sales tax constitutional nexus case to find a legally sufficient non-physical presence is highly questionable in an income tax sourcing issue for an individual.  In addition to the employee’s residence, the almost universal income tax sourcing factor for wages and other personal service income is the place where the work is physically performed. Nevertheless, this virtual presence argument now appears to be a part of New York’s position for continued application of the convenience rule to hybrid and remote employees, including those initially hired to work solely remotely and who may never actually go to New York for work.

We will follow and report on future developments in this case. The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.  

In 2021, the Department of Labor (DOL) issued cybersecurity guidance for ERISA-covered retirement plans. The guidance expands the duties retirement plan fiduciaries have when selecting service providers. Specifically, the DOL makes clear that when selecting retirement plan service providers, plan fiduciaries must prudently assess the cybersecurity of those providers.  

On May 15, 2024, the Securities and Exchange Commission (SEC) adopted amendments to Regulation S-P which governs the treatment of nonpublic personal information about consumers by certain financial institutions, many of which are commonly vendors and service providers to retirement plans. For example, the amendments reach broker-dealers, investment companies, registered investment advisers, and transfer agents. Importantly, the amendments establish specific cybersecurity requirements for these entities, requirements that retirement plan fiduciaries should be aware of. More…

Background

Section 1557 is the non-discrimination provision of the Affordable Care Act (ACA).  Section 1557, which has been in effect since 2010, is intended to prevent discrimination in certain health programs or activities that receive federal financial assistance.   In May of 2024, the Department of Health and Human Services’ (HHS) Office of Civil Rights (OCR), the agency responsible for the implementation and administration of Section 1557, issued final regulations governing Section 1557 (the 2024 Final Rule).  The 2024 Final Rule is not OCR’s first bite at this apple.  In fact, the 2024 Final Rule represents OCR’s third attempt to establish regulations under Section 1557: 

The 2024 Final Rule is based on the NPRM and comments received in response to it. While the Rule applies broadly to nearly every healthcare industry sector, this article addresses its impact on employer-provided group health plans. 

Scope of the 2024 Final Rule

Under the 2024 Final Rule, a “covered entity” receiving federal financial assistance is prohibited from discriminating on the basis of “race, color, national origin, sex, age, disability, or any combination thereof” concerning the provision or administration of health benefits.   For this purpose, a “covered entity” includes any health insurance issuer, broker, pharmacy benefit manager, or third-party administrator receiving federal financial assistance, including Medicare payments, grants, loans, credits, subsidies, and contracts.  The preamble to the 2024 Final Rule states that most employer-provided group health plans are not covered entities.  However, because the 2024 Final Rule will apply to most service providers, the rule will indirectly affect employer-provided group health plans.   

Protections Under the 2024 Final Rule

The 2024 Final Rule clarifies OCR’s position on certain open issues affecting employer-provided group health plans, notably:

  • Transgender Care.  Section 1557 and the journey to the Final 2024 Rules have been largely driven by litigation surrounding coverage of gender-affirming care.  On the heels of Bostock, the 2024 Final Rule attempts to establish that the federal prohibition against discrimination on the basis of “sex” includes gender identity.   The 2024 Final Rule specifies that sex discrimination includes discrimination on the basis of “sex characteristics, including intersex traits … sexual orientation; gender identity; and sex stereotypes.”  This means that covered entities are prohibited from denying, limiting, or otherwise excluding gender-affirming care or placing stricter restrictions or more significant cost-sharing requirements on services performed for gender-affirming care as those imposed on the same services when performed for other medical diagnoses.   

The 2024 Final Rule attempts to ward off challenges to the prohibition against categorical exclusions of gender-affirming care by preempting those challenges. The 2024 Final Rule explicitly states that, to the extent states have laws prohibiting gender-affirming procedures, Section 1557 preempts such laws. The state of Florida has already challenged this preemption provision.    

  • Pregnancy and Abortion.    The 2024 Final Rule also clarifies that “sex discrimination” includes discrimination related to pregnancy and pregnancy-related conditions.  The 2024 Final Rule does not address abortion.  However, in the preamble, OCR affirms that Section 1557’s protections include discrimination in abortion coverage.  However, the 2024 Final Rule does not require the coverage of abortion and is not intended to override any state-specific laws regarding abortion.  Under Section 1557, a decision not to provide abortions is discriminatory only if the decision is applied differently based on prohibited classifications. 

Conscience Exemption

Throughout the 2024 Final Rule, OCR specifies that Section 1557 should not be construed to affect federal laws regarding conscience or religious protection.  Covered entities can either rely on the federal protections for religious freedom and conscience laws or apply for a “conscience exemption” from the OCR.  Because the 2024 Final Rule directly governs covered entities, not plan sponsors, employers seeking a conscience or religious exemption from Section 1557 may not be able to rely on the 2024 Final Rule as the basis of such exemption.    

The Path Forward

Generally, the 2024 Final Rule is effective as of the first day of the first plan year beginning on or after January 1, 2025.  However, the 2024 Final Rule will likely have the same challenging road as its predecessors.  Litigation involving prior Section 1557 legislation remains pending in more than one federal district court.  And, on May 6, 2024, mere days after the 2024 Final Rule was passed, the state of Florida filed a lawsuit on behalf of a religious medical group seeking an injunction against the 2024 Final Rule. 

While it may seem the 2024 Final Rule is the last word on the topic, until the legal challenges are resolved, one would be wise to contact a knowledgeable ERISA attorney with questions.  The Jackson Lewis Employee Benefits Practice Group members can help if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

On April 23, 2024, the United States Department of Labor (DOL) issued updates to the investment advice fiduciary regulation, formally called the “Retirement Security Rule” and generally referred to as the “DOL Fiduciary Rule.”  These updates, generally effective September 23, 2024 (a one-year transition period extends the effective date for some provisions into 2025), will have broad implications in the insurance and financial services industries.  With the ink barely dry, the first legal challenge to the Retirement Security Rule has been filed.  (Federation of Americans for Consumer Choice Inc. v. DOL, complaint filed 5/2/24)(FACC Litigation.)

Statutory and Regulatory Background 

Under the Employee Retirement Income Security Act (ERISA), certain individuals are considered “fiduciaries.”  As such, they are held to the highest standards known to law and are personally liable for failing to abide by these standards.  These fiduciary duties are reinforced by prohibitions against certain Prohibited Transactions, which forbid a fiduciary from ‘‘deal[ing] with the assets of the plan in his own interest or for his own account,’’ and ‘‘receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.’’ DOL has authority to grant Prohibited Transaction Exemptions to these broad prohibitions for compliant transactions.  Absent an exemption, a fiduciary cannot receive any consideration or compensation for any investment transaction involving the assets of an ERISA plan.

 Since many protections, duties, and liabilities in ERISA hinge on fiduciary status, determining who is a ‘‘fiduciary’’ is of central importance.  ERISA has a statutory definition of “fiduciary,” which includes three fiduciary categories.  Relevant to the Retirement Security Rule are those individuals who are considered fiduciaries because they “render investment advice for a fee.” 

Five Part Test 

In 1975, the DOL implemented by regulation a “five-part test” for determining whether someone was rendering investment advice to an employee benefit plan and, therefore, would be considered an ERISA fiduciary.  Under the five-part test, a person is a fiduciary only if they: (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, buying, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions about plan assets, and that (5) the advice will be individualized based on the particular needs of the plan.  All five parts of this test must be met for fiduciary status to attach. 

2016 Final Rule and Judicial Challenges 

Beginning in 2010, the DOL began revising the regulatory definition of an investment advice fiduciary.  The impetus for this process was the changing retirement landscape from defined benefit to defined contribution plans and the resulting shift toward individual control over investment decisions via participant-directed (e.g., 401(k)) plans and individual retirement accounts.  A proposed rule was adopted in 2010 and withdrawn in 2011 amid widespread criticism.  In April 2015, the DOL again proposed new regulations defining investment advice fiduciary status and finalized that rule in April 2016 (the 2016 Final Rule.) After a series of legal challenges, the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) vacated the 2016 Rule in Chamber of Commerce v. United States Department of Labor.

The Retirement Security Rule

On November 3, 2023, the DOL adopted a proposed Retirement Security Rule.  The Retirement Security Rule was adopted in final form on April 23, 2024.  DOL also made widespread changes to the related Prohibited Transaction Exemptions.

The Final Rule states that a financial professional acts as a fiduciary if: 

  • The financial professional makes a recommendation to a retirement investor;
  • That recommendation is for a fee (either direct or indirect); and
  • One of the following:
    • There is a representation or acknowledgment that the professional is a fiduciary; or
    • The financial professional provides investment recommendations to investors on a regular basis as part of their business, and the facts and circumstances objectively indicate all the following about the recommendation:
      • it is based on the review of the retirement investor’s particular needs or individual circumstances;
      • it reflects the professional judgment of the financial professional to the retirement investor’s particular needs; and
      • it may be relied on by the retirement investor as intended to advance the retirement investor’s best interest.

DOL has expressed concern that the “regular basis” and “mutual agreement” prongs of the prior Five-Part Test “worked to defeat legitimate retirement investor expectation of impartial advice” and attempted to close these perceived loopholes in the Retirement Security Rule.  The rule, as adopted, broadens both the number of people who will be considered ERISA investment advice fiduciaries and the advice that will be considered investment advice.

The FACC Litigation

On May 2, 2024 (or 9 days after the Final Rule was adopted), the FACC filed its complaint in the United States District Court for the Eastern District of Texas.  Not surprisingly, the Complaint relies heavily on the Fifth Circuit’s decision in Chamber of Commerce (which is controlling precedent.)  The complaint alleges that the DOL both exceeded their regulatory authority and acted in an arbitrary and capricious manner in adopting the Retirement Security Rule and amending the related Prohibited Transaction Exemptions.

DOL’s adoption of the Retirement Security Rule is the latest step in their ongoing (now approaching 15-year) attempt to shore up what they see as gaps in fiduciary coverage related to investment advice.  The FACC Litigation is likely the first of several judicial challenges to the Retirement Security Rule.  We will continue to monitor and report on this evolving area.  If you have any questions, please contact any member of the Jackson Lewis Employee Benefits Practice Group or the Jackson Lewis attorney with whom you work.