The 50th anniversary of the passage of ERISA will occur in 2024, but there is still no definitive guidance on some of the provisions that were part of the original legislation. Guidance is needed on more recent legislation as well. Benefits professionals trying to implement the complex changes enacted in the two SECURE Acts, while acknowledging the burden placed on the agencies administering ERISA, are also frustrated by the slow pace of published guidance. Here is a list of steps that courts and Congress could take in the coming year to help stem meritless fiduciary breach litigation, better enable recordkeepers and plan sponsors to timely implement provisions of SECURE 2.0, and encourage the adoption of new plans.
1. Decide when participants can be required to arbitrate ERISA fiduciary breach claims. ERISA is silent on whether participant lawsuits can be subject to mandatory arbitration and class action waivers. The Federal Arbitration Act generally applies to employment-related claims and evidences a federal policy in favor of arbitration. Although no federal court has decided that ERISA never permits arbitration, the federal courts are not in agreement about issues such as whether the plan must contain language agreeing to arbitration or when an exception to the FAA’s presumption of arbitrability created by the courts, which applies when arbitration would prevent the effective vindication of statutory rights, applies. Compare, for example, the Ninth Circuit decision in Dorman v. The Charles Schwab Corporation, 934 F.3d 1107 (9th Cir. 2019) with the approach of the Third Circuit in Henry v. Wilmington Trust N.A., 72 F.4th 499 (3d Cir. 2023). The Supreme Court needs to clarify the rules.
2. Decide when lawsuits based on alleged prohibited transactions can proceed. Service agreements are alleged to involve prohibited arrangements and self-dealing in many cases challenging 401(k) and 403(b) plan investments. Again the circuit courts cannot agree on an important issue-in this case, what plaintiffs need to set out in their complaints to prevent the prohibited transaction claims from being dismissed.
ERISA makes all transactions in which plans pay service providers prohibited transactions unless exempted, and service providers all rely on the exemption in ERISA Section 408b-2 covering the payment by a plan of reasonable compensation for necessary services. The courts don’t agree on whether a plaintiff needs to allege more than that a service provider pays fees under a contract with a plan to prevent the claim from being tossed out. For example, compare the Ninth Circuit decision in Buglielski v. AT&T Services, 76 F.4th 894 (9th Cir. 2023), which has been criticized as not requiring enough of plaintiffs, with the Second Circuit Court of Appeals decision in Cunningham v. Cornell University, No. 21-88, 2023 BL 411284 (2d Cir. Nov. 14, 2023). The Cornell decision applies a common sense standard by requiring plaintiffs to allege that the contract was either unnecessary or resulted in payment of unreasonable compensation in order for the case to proceed. The Supreme Court could impose reasonable pleading standards across the country if it decided to rule on this issue.
3. Stop trying to micromanage plan investments. Lawsuits have been filed against America Airlines and New York City pension plans challenging ESG-related investments. Traditional legal concepts such as standing are stretched to the limit in these lawsuits which appear to be motivated by political considerations. The recently issued new fiduciary rule will also be subject to numerous challenges if the past is any guide. Legislation is also periodically introduced in Congress to permit or restrict certain plan investments. Courts need to insist that strict traditional standards for challenging complaintss are applied to eliminate suits by people who just don’t like what they are challenging but haven’t suffered any actual harm. The courts and Congress should defer as ERISA does to the judgment of plan investment fiduciaries, who are best positioned to know what is appropriate and can be personally liable for fiduciary breaches. That’s the reason ERISA doesn’t contain a list of permissible investments.
4. Congress should make it more attractive to adopt and administer 401(k) plans. Employees are not saving enough to support them in retirement, and this gap is larger for small businesses. Instead of trying to micromanage investments, Congress could more productively follow on the model set by state retirement savings programs and simplify participation for businesses that don’t currently offer plans. . The starter 401(k) created by SECURE 2.0 and pooled employer plans (PEPs) are a start, but the starter plan and the state programs don’t permit employer contributions and have lower contribution limits than standard 401(k) plans. Employers find it hard to evaluate PEPs. There should be a model simplified plan with the same contribution limits as standard 401(k) plans that can be adopted by completion of an IRS form, such as the forms that already exist for IRAs and SIMPLE IRAs, and that makes pre-selected investments available.
5. The IRS and Department of Labor should clarify SECURE Act rules faster. As of today, tax guidance has been issued regarding self-correction of operational mistakes and mandatory inclusion of long-term part-time employees (LTPT employees.) The LTPT employee rules become effective January 1, 2024, but complicated regulations were issued only recently. Recordkeepers and plan sponsors are scrambling to comply because of the short lead time. Mandatory auto-enrollment for new plans will become effective in 2025, and there are many unanswered questions about which plans are covered. Grab bag guidance may be coming at the end of this year, but it will need to deal with lots of details to be a real help to those who need to comply with the rules. Recognizing the burden placed on the IRS by recent legislation, more transition periods for compliance, such as the extension of time granted to comply with the new requirement that highly paid participants may make catch-up contributions only on a Roth basis, may be needed if guidance cannot be issued fast enough to provide reasonable lead times for recordkeepers and plan sponsors.
SECURE 2.0 also made major changes to employee disclosure rules and requires the Department of Labor to establish a national participant lost and found. ERISA was also amended to add specific rules for recouping plan overpayments, but it is unclear the extent to which prior case law will apply. Most plans encounter overpayment issues, so the release of guidance on this provision will be particularly helpful to plan fiduciaries.
If even one suggestion on this wish list is implemented, it will be a banner anniversary year for ERISA.