"The developments of 2024 highlight the 'seesaw' nature of the American political environment, particularly in the sphere of regulatory initiatives, with agencies issuing regulations intended to protect workers and their retirement benefits only to be beaten back (at least for now) by conservative courts in lawsuits brought by various business and, in some cases, state government interests. The affected agencies have appealed, but with the upcoming change in the White House, it appears that the agencies' positions may 'seesaw' the other way. Further, in 2024, the field of employee benefits fully lived up to its reputation as one of the most litigious areas of law and one of the most complex in terms of regulations."
2024: HIGHLIGHTS
ERISA Fiduciary Rule
The Department of Labor (DOL) has struggled mightily for the past 14 years to issue a regulation with respect to fiduciary status under ERISA that can withstand judicial scrutiny and has been defeated yet again in 2024, at least for now, in the District Courts of Texas. Each of the courts in Federation of Americans for Consumer Choice Inc. v. United States DOL1 and American Council of Life Insurers v. United States DOL2, respectively, have stayed the DOL's "fiduciary rule," which was scheduled to take effect in September 2024.
The DOL's repeated efforts over the years to revise the regulatory definition of a "fiduciary" have been met each time with fierce opposition. The latest iteration of the rule, issued by the agency in May 2024, would broaden the definition of "investment advice" (and thus who is an investment advice fiduciary under ERISA) and add complex requirements to certain prohibited transaction exemptions used by insurers and investment advisers. The stays by the Texas courts, like several in the past, create uncertainty regarding the fiduciary status of insurers and other parties selling financial products and the manner in which they are permitted to comport their businesses. The DOL has appealed the stays to the Fifth Circuit, but, in the meantime, the industry must cope with uncertainty, and, with Trump's election, the ultimate prognosis for the rule looks grim.
ESG
In 2022, the DOL under the Biden Administration issued amendments to the rule "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,"3 known as the "ESG rule." The Biden ESG rule overturned guidance from the Trump Administration in 2020 that forbade plan fiduciaries from utilizing "non-pecuniary" factors in investment decisions and, instead, permitted, but did not require, fiduciaries to consider these factors. Twenty-six Republican state attorneys general, a Liberty Energy subsidiary, and an energy trade group challenged the rule in the Northern District of Texas.4 After the Texas District Court upheld the rule, the plaintiffs appealed to the US Fifth Circuit of Appeals, which decided not to weigh in on the merits of the case. Instead, in 2024, the Fifth Circuit sent the case back to the lower court for a narrower ruling on whether the rule "can be squared" with ERISA or the Administrative Procedures Act.5
As it seems likely that the Biden ESG rule will be modified or repealed under the Trump Administration, the consideration of ESG factors by pension fund managers will become challenging. Plan fiduciary committees of defined contribution plans may be more reluctant to include ESG funds as designated investment alternatives or qualified default investment alternatives on plan menus out of concern about litigation risk.
Lifetime Income Products for Defined Contribution Plans
With the general shift in the US retirement landscape from defined benefit pension plans to 401(k) plans, and the resulting transfer of investment and longevity risk from plan sponsors to participants, the market has responded with the development of a variety of products designed to provide 401(k) participants with protected income for their remaining lives in retirement. Over the past several years, including in 2024, we have seen an accelerated proliferation of products, which include, among others, single premium immediate and deferred annuities purchased at retirement with assets in a participant's account balance; in-plan accumulation fixed annuities purchased over multiple years; variable annuity products; and guaranteed minimum withdrawal riders to insurance contracts that allow an individual to withdraw a percentage of a specified base amount each year until assets are exhausted, at which point a fixed annuity for the balance of the individual's life may become payable. Additionally, in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Congress created a new fiduciary safe harbor for choosing an annuity provider of "in-plan" annuities, which has given some plan fiduciary committees greater comfort in selecting these products for their plans. We expect to see continued growth in the range and sophistication of these products. (Read more on this in Lifetime Income Products in CITs on the Rise.)
Executive Compensation/Non-competes
To the relief of many employers, a federal district court (yet
again in Texas) ruled in August 2024 that the Federal Trade
Commission's (FTC) non-compete rule is unlawful and may not go
into effect on its intended effective date (September 4, 2024) or
thereafter. (The final rule was issued by the FTC on April 23,
2024.) The stay applies nationwide.
This development is significant as the rule would have banned
nearly all non-compete agreements between employers and employees.
Under the final rule, existing non-competes (i.e., those that were
in place prior to the proposed effective date of September 4, 2024)
for senior executives would be permitted to remain in force, but
employers would be prohibited from entering into new non-competes
with senior executives after the effective date. (Workers who are
in policy-making positions and whose annual compensation is more
than $151,164 would be considered executives under the rule.)
The final rule would have had significant consequences in the area
of executive compensation as, inter alia, it would have
prohibited conditioning the payment of severance upon compliance
with a post-employment non-compete and providing for the clawback
or forfeiture of compensation (including equity) on account of a
violation of a post-employment non-compete. (There was an exception
in the final rule for certain non-competes entered into as part of
a bona fide sale of a business.) Commentators had urged employers
to consider entering into new or revised non-competes with their
executives prior to the rule's effective date.
However, given that the nationwide stay was entered into prior to
the effective date, we expect most employers to take a wait-and-see
approach with regard to the final rule and not make any changes to
their compensation arrangements based on the final rule until the
judicial process is completed. (The FTC has filed an appeal, but it
is not clear, with the new Administration, whether that appeal will
be pursued. (See further below.)
Health and Welfare Plans
Litigation. A proposed class action was filed earlier
this year against Johnson and Johnson (J&J) and its Pension
& Benefits Committee. It alleges violations of fiduciary duties
in managing prescription drug benefits for participants in its
employer-sponsored medical plans and in selecting its pharmacy
benefits manager (PBM). It also alleges failures to engage in a
prudent process by negotiating lower prices with the selected PBM,
considering contracting with a different PBM, using an alternative
PBM approach, or carving out their specialty drug program from the
PBM contract. This case suggests an increasing focus by plaintiffs
on health plans, health plan fiduciaries, and the rising costs of
health care. (Read more on this class action in our Legal Update
"Health Care Plans and Pharmacy Benefit Managers
Targeted in Class Action.")
PBMs have been the subject of congressional hearings and a Federal
Trade Commission probe begun in 2024 on account of concerns with
respect to their market power and effect on pricing and
availability of drugs in the market. Regardless of the result in
the J&J case, we expect further focus on this industry by
Congress and the applicable regulators.
Regulation. While we did not see the sweeping health care
legislation we have seen in prior years, there were still many
regulatory updates in 2024. These included final regulations under
the Mental Health Parity and Addiction Equity Act, which in some
cases clarify existing standards and in other cases apply new ones
entirely—in particular, expanding the requirements for
nonquantitative treatment limitation analyses. The HIPAA Privacy
Rule was also amended effective June 25, 2024 (though in many cases
with delayed compliance dates), with changes primarily related to
reproductive care. A change in Administration will bring a new set
of eyes and new perspective to regulations applicable to health
plans and will likely result in a flurry of regulatory activity.
(See further below.)
For more on recent changes affecting health and welfare plans, see
our recent Legal Update "United States: Health and Welfare Hot
Topics."
Qualified Plans
Litigation. 2024 saw the usual parade of excessive fee
cases but had some interesting new kids on the block, among them
challenges to (i) pension risk transfer transactions, and (ii) the
use of forfeitures to fund employer contributions.
Pension Risk Transfers. Class actions were filed in 2024
against a number of large companies, challenging their pension risk
transfer transactions (PRTs), pursuant to which liabilities for
participant pension plan benefits were transferred to an insurance
company. The common denominator among the cases is Athene Life and
Annuity Company (Athene).
In a PRT transaction, the choice of insurer and terms of the
insurance contract are subject to ERISA's fiduciary duties.
Plaintiffs allege in each case that the plan fiduciaries breached
their duty of prudence to participants by failing to select the
"safest" available annuity provider. Plaintiffs assert
this even though the chosen annuity provider, Athene, has yet to
fail to make required payments. Plaintiffs also allege in several
cases that defendants engaged in fiduciary self-dealing (breaching
their duty of loyalty) by selecting the lowest cost annuity
provider in order to maximize the recovery for the plan
sponsors.
Motions to dismiss have been filed in a number of cases, but no
decisions have yet been rendered.
Use of Forfeitures to Fund Contributions. Federal courts
have begun to issue conflicting decisions on the spate of lawsuits
filed in 2023 and 2024 regarding the permissibility of using 401(k)
plan forfeitures to fund employer contributions. While the IRS
permits forfeited funds to be used to pay plan expenses or to fund
employer matching contributions, plaintiffs in recent cases have
argued that 401(k) plan fiduciaries have breached their ERISA
fiduciary duties by allowing the plan sponsor to use forfeitures to
fund employer contributions instead of reducing administrative fees
otherwise borne by plan participants. So far, at least three of
these suits (filed in the Eastern District of Virginia, Northern
District of California, and Southern District of California) have
been dismissed at the pleading stage, while at least two others
(filed in the Northern and Southern Districts of California) have
been allowed to proceed. With several pending cases on the same
issue, 2025 will see more developments on the use of forfeitures to
fund employer contributions.
Regulations and Other Agency Guidance. In July 2024, the
IRS issued long-awaited final regulations governing the required
minimum distributions that must be taken from retirement plans.
These regulations incorporate and expand on required minimum
distribution provisions in the recent SECURE and SECURE 2.0 Acts of
2019 and 2022, respectively. The IRS has also begun issuing
guidance for plan sponsors on other provisions of the SECURE and
SECURE 2.0 Acts. For example, it published guidance for plan
sponsors on making matching contributions to defined contribution
plans based on employees' eligible student loan payments and
guidance regarding the participation of long-term, part-time
employees in 401(k) and 403(b) plans.
2025: OUTLOOK
With a new Administration entering the White House in January 2025, we can expect a number of changes in direction with respect to ERISA, executive compensation, and employee benefit matters.
DOL and FTC Regulations
Notwithstanding the appeals filed by the DOL and FTC with respect to the ERISA Fiduciary Rule and the FTC ban on non-competes, these rules are considered to be on life support and commentators suggest that the Trump Administration will "pull the plug" rather than take steps to resuscitate them. The DOL under Trump is also expected to modify or outright repeal the Biden ESG Rule, which, as noted above, permitted, but did not require, ERISA plan fiduciaries to consider ESG factors in making investment choices. Even prior to the rule's repeal, we expect that plan fiduciary committees of defined contribution plans may be more reluctant to include ESG funds as designated investment alternatives or qualified default investment alternatives on plan menus out of concern about litigation risk.
Alternatives Investment Products for Defined Contribution Plans
ERISA fiduciaries have had concerns regarding the permissibility of providing 401(k) plan participants with access to direct or indirect investments in "alternative" asset classes (e.g., private equity, private credit), notwithstanding the eagerness of asset managers to offer such investments to them. The prior Trump Administration viewed providing retirement plan investors with access to private markets in a favorable light and, in 2020, issued an Information Letter6 stating that it is consistent with ERISA's duty of prudence for plan fiduciaries to offer a professionally managed, multi-asset class fund with an allocation to private equity. We expect that the second Trump Administration will maintain the same position and will not present any regulatory roadblocks discouraging the adoption of these products by plan fiduciaries for their 401(k) plans either as a designated investment alternative or, more commonly, as a part of the glide path of a custom target date fund. We therefore anticipate that the interest and demand for these products will continue to grow.
Health and Welfare
Then-candidate Trump, during the debate with Vice President Harris, stated that he had "concepts of a plan" to address the Affordable Care Act (the "ACA" or "Obamacare"), legislation that he had promised in 2016 to repeal. Most commentators do not believe he will pursue a complete repeal, and President-elect Trump recently commented that he has never said or thought about ending the ACA. That said, he or his Administration may pursue prior goals, such as allowing insurers to compete across state lines, as well as new initiatives such as mandating coverage of in vitro fertilization treatments in private and government plans; enacting legislation to facilitate certain health care arrangements known as "association health plans"; and generally focusing on measures to increase transparency, choice, and affordability. It is also considered likely that President-elect Trump will modify Biden-era regulations under Section 1557 of the ACA, which prohibit employer group health plans from discriminating based on protected characteristics in covered programs or activities, and which currently extend to protect gender identity.
Qualified Plan Class Actions
Finally, we can expect to see class action challenges continue with respect to broad-based retirement plans and possibly increasingly with respect to health and welfare plans.
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