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The ERISA Edit: DOL on Verge of Issuing Two High-Profile Proposed Regulations

Employee Benefits Alert

As we approach the end of the third year of the Biden administration, the U.S. Department of Labor (DOL) continues at a steady pace to issue proposed regulations governing ERISA health and retirement plans. Two highly anticipated proposals will almost certainly generate significant stakeholder interest and comment, potentially putting the skids on DOL's desire to finalize its regulatory priorities before summer 2024. Next summer's deadline is even more urgent with the risk of an incoming Republican administration. In that scenario, having the regulations in place could avoid possible legislative disapproval of new agency rules under the Congressional Review Act (CRA). 

Fiduciary Conflict-of-Interest Rule Version 3.0

Last week, DOL sent a new proposed "fiduciary rule" to the Office of Management and Budget (OMB) for review. OMB's review is generally the final step before the agency publishes a proposed rule in the Federal Register and, in most instances, begins receiving public comments. According to OMB's website, 

[t]his rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 C.F.R. 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners to receive investment advice, as well as developments in the investment marketplace, including the ways advisers are compensated that can subject advisers to harmful conflicts of interest.

This highly anticipated rulemaking would be DOL's third attempt to reinterpret the "investment advice" fiduciary definition in ERISA and replace the five-part regulatory test that has largely been in place since 1975. DOL has long been concerned that the 1975 test does not capture individual retirement account (IRA) rollover advice, which is often given on a one-time basis without an ongoing adviser-investor relationship. After setting aside a 2010 proposed rulemaking after facing stiff industry opposition, DOL issued its 2016 final rule reinterpreting what it means to be an ERISA investment advice fiduciary which, among other things, eliminated the ongoing relationship requirement contained in the five-part test. The 2016 rule was vacated by the Fifth Circuit in 2018. Following that 2018 court decision, DOL reinstated the original five-part test, but issued guidance to broaden its reach, again targeting advice in connection with IRA rollovers. That effort likewise failed to withstand a judicial challenge. Once the proposed rule is released, DOL almost certainly will be navigating intense lobbying efforts.

DOL Taking a Second Look at Association Health Plans

Also last week, DOL sent a new association health plan (AHP) proposed regulation to OMB. According to DOL, it will explore in the rulemaking whether to replace its 2018 regulation, 29 C.F.R. § 2510.3-5, with an alternative set of criteria for determining when an employer association may act indirectly in the interest of an employer under ERISA section 3(5) for purposes of establishing a multiple employer group health plan. In 2019, the U.S. District Court for the District of Columbia vacated portions of the 2018 rule, which provided a less stringent pathway for a group or association to establish a single ERISA-covered group health plan, on the basis that it was arbitrary and capricious and inconsistent with the text of ERISA. New York v. U.S. Dep't of Labor, 363 F. Supp. 3d 109 (D.D.C. 2019). In its decision, the court stated that the DOL regulation was "clearly an end-run around the [Affordable Care Act (ACA)] . . . designed to expand access to AHPs in order to avoid the most stringent requirements of the ACA." The Trump administration appealed that decision, but in January 2021, the Biden administration asked the appellate court to hold the appeal in abeyance while it considered whether to reexamine the 2018 regulation in new rulemaking. 

We'll provide updates on these proposals in future editions and can assist you in submitting comments to the proposals if you are interested in doing so.

Tenth Circuit Rejects Fee-Based Claims That Lacked Sufficient Detail to Support an Inference That Retirement Plan Fiduciaries Violated Their ERISA Duties 

The U.S. Court of Appeals for the Tenth Circuit has affirmed the dismissal of a complaint alleging fiduciary breaches by Barrick Gold, its Board of Directors, and its Benefits Committee (Committee) in connection with the Barrick Gold 401(k) Plan (Plan). In Matney v. Barrick Gold of North America, No. 22-4045, 2023 WL 5731996 (10th Cir. Sept. 6, 2023), two Plan participants brought a putative class action under ERISA §§ 409 and 502. They alleged that the Committee breached its fiduciary duties of prudence and loyalty by offering high-cost funds and causing the Plan to pay high recordkeeping fees. They also claimed that Barrick Gold and the Board breached their fiduciary duty to monitor the Committee's actions. The district court dismissed the complaint for failure to state a claim on which relief could be granted. On de novo review, the Tenth Circuit affirmed.

The Tenth Circuit addressed the allegations against the Committee first. The plaintiffs alleged that because the Plan offered funds that carried higher investment management fees than otherwise identical alternative funds and paid excessive recordkeeping fees, the Plan's participants were left with less money in their accounts. After determining that the appeal raised a pleading issue of first impression in the circuit, the Tenth Circuit reviewed four decisions from its sister circuits for guidance. See Albert v. Oshkosh Corp., 47 F.4th 570, 574 (7th Cir. 2022); Smith v. CommonSpirit Health, 37 F.4th 1160, 1162 (6th Cir. 2022); Sweda v. Univ. of Pa., 923 F.3d 320, 324 (3d Cir. 2019); Meiners v. Wells Fargo & Co., 898 F.3d 820, 821 (8th Cir. 2018). Following the Eighth Circuit's lead in Meiners, and consistent with the analyses of the Third, Sixth, and Seventh Circuits, the Tenth Circuit held that "there is no doubt a claim for breach of ERISA's duty of prudence can be based on allegations that the fees associated with the [plan] are too high compared to available, cheaper options. But to raise an inference of imprudence through price disparity, a plaintiff has the burden to allege a 'meaningful benchmark.'" According to the court, 

when it comes to comparing investment management fees, a meaningful comparison will be supported by facts alleging, for example, the alternative investment options have similar investment strategies, similar investment objectives, or similar risk profiles to the plan's funds.

In this case, the plaintiffs did not meet their burden. The Tenth Circuit concluded that the complaint lacked facts providing meaningful benchmarks and instead offered only apples-to-oranges comparisons. First, although the complaint compared the Plan's mutual funds to collective trusts (CITs) and alleged that investments in the CITs were identical to those held by the mutual funds (except for the CITs' lower cost), the court held that the plaintiffs failed to provide "information about the goals [and] strategies of the various mutual funds or the CITs so as to establish their comparability." Second, the complaint compared the Plan's funds to alternative, less expensive, and better performing funds, but contained only "a single [conclusory] allegation that the Plan's funds and the alternative actively and passively managed funds [we]re comparable." According to the Tenth Circuit, "[a]bsent facts alleging the better performing . . . funds are similar enough to the Plan's funds, the complaint fail[ed] to supply a meaningful benchmark for comparison." Third, a published study that showed median expense ratios for various investment categories did not provide a useful benchmark either, because the study "reveal[ed] no information about how the specific funds within [each] category operate." In all, the Tenth Circuit held that the district court correctly determined that the complaint failed to state a claim that the Committee was imprudent in offering funds with higher cost investment management fees.

The court also found that the complaint failed to state a claim of imprudence based on recordkeeping fees. Alleging that the Committee failed to regularly solicit requests for proposals was insufficient to raise a plausible inference of imprudence, especially when the Committee regularly renegotiated their fee arrangement with the Plan's recordkeeper, resulting in lower costs for participants. Moreover, the "relevant comparative data point" was the services offered for the price charged, but the plaintiffs failed to offer factual allegations about the services provided to the Plan or the plans assessed in a data source known as the 401k Averages Book, again failing to provide a meaningful benchmark.

Turning to Barrick Gold and the Board, the plaintiffs conceded before the district court that their duty to monitor claims were derivative of their claims against the Committee. Because the Tenth Circuit affirmed the district court's dismissal of the fiduciary claims against the Committee, it also affirmed the decision to dismiss the duty to monitor claim against Barrick Gold and the Board.

With this decision, five Courts of Appeals appear broadly aligned in articulating pleading standards that apply to "fee" cases claiming a breach of fiduciary duty. Simply pointing to a fund with better performance or lower recordkeeping fees will not suffice. Instead, following the Supreme Court's decision in Hughes v. Northwestern, for a complaint to pass muster under Iqbal and Twombly, the Third, Sixth, Seventh, Eighth, and Tenth Circuits all require, at a minimum, a "meaningful benchmark" or a direct comparison of investments with similar, if not identical, goals and strategies, and/or an apples-to-apples comparison of recordkeeping services provided in exchange for fees charged. 

Upcoming Speaking Engagements and Events

On October 17, Joanne Roskey will present, "Headaches, Heartburn, and Anxiety - Mental Health Parity Policy Implications," to members of the ERISA Industry Committee.

On October 31, Joanne Roskey and Dawn Murphy-Johnson will present, "State Legislative Activities Impacting Employee Benefits," an American Staffing Association webinar.

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