This week sets the all-time record for a slow week in the courts, with only three relevant ERISA decisions reported. Although Your ERISA Watch normally focusses on case law, given the dearth of material we are dispensing with the Case of the Week and instead discussing a Regulation of the Week. After all, it was big news on October 31 when the Department of Labor dropped its latest proposal regarding the regulation of fiduciary investment advisors, a topic with a long and tortuous history.

Because life is short (so many interesting ERISA issues, so little time), I won’t attempt a complete analysis of that history or the latest proposed regulation and exemptions. Instead, I will offer a few thoughts about the proposal.

But first, the history in a nutshell. ERISA includes within its broad and functional definition of fiduciary a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.” 29 U.S.C. § 1002(21)(A)(ii). Sounds straightforward enough.

However, in 1975, shortly after ERISA was enacted, the DOL promulgated an investment advisor regulation that appeared to convert a two-part statutory test for determining whether a person rendering investment advice is a plan fiduciary into a five-part test, with at least two parts seemingly pulled out of thin air. Under this regulation, in addition to the statutory requirements that the person in question must (1) render investment advice (including as to the value of plan property) (2) for a direct or indirect fee or other compensation, the regulations added the requirements that (3) the advice be “pursuant to mutual agreement, arrangement, or understanding” with the plan or plan fiduciary, (4) the advice “will serve as the primary basis for investment decisions with respect to plan assets,” and (5) the person in question “will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments.” 29 C.F.R. § 2510.3-21(a)(1). The IRS promulgated a nearly identical regulation. The DOL also issued an advisory opinion in 2005 (A.O. 2005-23A or the “Deseret Letter”), which stated that advice about distribution options from a plan, including about where to invest such distributions, was not covered fiduciary advice.

Whew. Needless to say, this regulatory definition significantly narrowed the universe of plan advisors that one would expect to be considered fiduciaries under the statutory definition. For this reason, particularly after the rise of 401(k) and other defined contribution plans, the DOL began to consider reining in this regulation in order to hew more closely to what seems to have been the congressional intent to cover all paid plan investment advisors. However, the DOL found that once it had opened up a sizable loophole, narrowing it again would be a difficult task.  

Although the DOL began the formal process of reconsidering the regulation in 2010, it wasn’t until 2016 that it issued two notices of proposed rulemaking and held hearings, and then issued a final rule and two new prohibited transaction exemptions (as well as amendments to a number of others). Among other things, the changes were designed to cover many kinds of one-time advice, retract the Deseret Letter by covering recommendations to rollover ERISA plan and IRA assets, make the regulation applicable to IRAs, and require that advisors act in the best interest of the plans and IRAs.

The DOL’s regulatory actions were immediately challenged in multiple lawsuits filed in federal courts across the country. District courts in the District of Columbia, Texas, and Kansas, as well as the Tenth Circuit Court of Appeals, upheld the final rule as well within the authority of the DOL (and indeed more consistent with the statutory language). But none of that mattered because the Fifth Circuit overturned the Texas judge’s ruling and vacated the 2016 rule in its entirety. The Fifth Circuit expressed concern that the DOL had untethered fiduciary status from notions of trust and confidence and that the DOL had exceeded its authority through rulemaking that covered not only Title I ERISA plans but also IRAs governed by Title II.

Well, that was a rather big nutshell, and you’ll have to trust me that I didn’t cover everything. But I am guessing that the pressing questions for our readers (at least those who have read so far) are how the current proposal differs from the 2016 rulemaking, what changes are likely to be made to the proposal during the rulemaking process, and what the chances are of a new final regulation surviving a challenge. As with most things in this area of the law, the answer is complicated.

First, some of the changes from the 2016 regulation that jumped out at me are that the proposal (1) mostly swaps out the language referring to plans and IRAs for the term “retirement investor,” (2) changes the focus of the “regular basis” prong of the 1975 test from the retirement investor to the advisor (that is, the advisor has to make investment recommendations on a regular basis), (3) states that the recommendation must be made under circumstances that indicate it is individualized, reliable, and in the investor’s best interest, and (4) states that written disclaimers of fiduciary status will not control over “oral communications, marketing materials, applicable State or Federal Law, or other interactions with the retirement investor.”

It is difficult to know how much of this proposal will change before the DOL issues a final rule because the DOL must of course be responsive to the comments it receives. But we are talking about at least the third rodeo for the DOL on these issues, so my best guess is that this was very well considered, and changes are likely to be around the edges. I did wonder if the DOL might consider a severability provision. I actually think that is unlikely, but it could conceivably help some of the regulation survive.

This brings us to the last question. Whether the final rule will survive, in whole or in part, the legal challenges that are sure to follow present the toughest test of all because they depend in part on what the final rule looks like, and on who the reviewing judges are. But the DOL certainly made an effort to address the Fifth Circuit’s trust law concerns and also did an excellent job explaining the importance of the issues from an economic and societal perspective.

If you want to dig into the new regulations for yourself, feel free to visit the links below:

Proposed Retirement Security Rule

Proposed Amendment to PTE 2020–02

Proposed Amendment to PTE 84–24

Proposed Amendment to PTEs 75–1, 77–4, 80–83, 83–1, and 86–128

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

ERISA Preemption

Seventh Circuit

Stanford Health Care v. Health Care Serv. Corp., No. 23-cv-4744, 2023 WL 7182990 (N.D. Ill. Nov. 1, 2023) (Judge Joan B. Gottschall). Plaintiff Stanford Health Care, a healthcare provider in California, sued Health Care Service Corporation d/b/a Blue Cross and Blue Shield of Illinois and Blue Cross and Blue Shield of Texas, in Illinois state court alleging claims of breach of implied contract and, pled in the alternative, quantum meruit, for the insurer’s failure to reimburse it at the costs agreed upon in a contract it entered into with Anthem Blue Cross, the parent association of which Health Care Service Corporation is a member. Stanford Health maintains that Health Care Service Corp. has not paid either the discounted agreed-upon rates set out in the contract nor the usual and customary cost of the services at issue. Defendant removed the action to federal court, arguing that ERISA preempts the claims asserted. Stanford Health disagreed, and moved to remand the action back to state court. The court granted the motion to remand in this decision. It agreed with the provider that this action is not a lawsuit seeking to recover benefits under an ERISA plan, to enforce plan rights, or to determine rights to any future benefits under the terms of an ERISA plan. Instead, it ruled that Stanford Health brought non-preempted “rate claims” as a medical provider to enforce terms of a contract unrelated to any ERISA plan. The court expressed that Stanford Health’s claims are about the amount of payment and not the right to payment, meaning “there is no need to interpret an ERISA plan because the rate to be paid is external from the ERISA plan.” Accordingly, the court concluded that there were no grounds for removal because ERISA does not completely preempt the two state law causes of action.

Life Insurance & AD&D Benefit Claims

Fifth Circuit

Metropolitan Life Ins. Co. v. Muecke, No. 22-01029, 2023 WL 7131041 (W.D. La. Oct. 30, 2023) (Judge Donald E. Walter). Interpleader plaintiff Metropolitan Life Insurance Company commenced this action after two individuals submitted claims to recover life insurance benefits from an ERISA-governed life insurance policy belonging to decedent Joe Nickle. Those two individuals, Mr. Nickle’s son, Cameron Nickle, and Joe Nickle’s girlfriend, Deanna Muecke, each moved for summary judgment and to be awarded the $20,000 in benefits plus interest. In this decision the court granted judgment in favor of Ms. Muecke because she was the named beneficiary of the policy. The court rejected the younger Mr. Nickle’s arguments that Ms. Muecke was fraudulently listed as the beneficiary and that the elder Mr. Nickle was under undue influence, misled, and deceived by Ms. Muecke when naming her as the beneficiary. The court found these allegations advanced by Cameron Nickle to be speculative, not alleged with sufficient particularity, and presented without competent supporting evidence. Accordingly, the court honored the elder Mr. Nickle’s beneficiary designation and paid the benefits to Ms. Muecke according to his wishes.

Withdrawal Liability & Unpaid Contributions

Fifth Circuit

New Orleans Employers Int’l Longshoremen’s Ass’n, AFL-CIO Pension Fund v. United Stevedoring of Am., No. 22-2566, 2023 WL 7220551 (E.D. La. Nov. 2, 2023) (Judge Ivan L.R. Lemelle). More than a year ago, plaintiffs New Orleans Employers International Longshoremen’s Association, AFL-CIO Pension Fund and its administrator commenced this ERISA civil enforcement action against two defendants, United Stevedoring of America, Inc. and American Guard Services, Inc., which are companies they believe to be a controlled group or a single employer for the purposes of withdrawal liability. In March of 2021, United Stevedoring’s collective bargaining agreement was terminated, and the employer completely withdrew from the pension fund. The next month, plaintiffs sent notice to the employer of its withdrawal assessment and demanded payment. United Stevedoring subsequently requested additional information from the fund to which plaintiffs responded on April 12, 2022. That response started a sixty-day clock for the employer to initiate arbitration should it wish to contest the fund’s assessed amount of withdrawal liability. By June 11, 2022, the date when the window to initiate arbitration ended, United Stevedoring had not filed for arbitration with the American Arbitration Association. The company would not do so for over a year, after this lawsuit was filed, while the discovery process was underway. Instead, the only action related to initiating arbitration proceedings that the employer took within the sixty-day window was to send an email to plaintiffs on June 2, 2022, requesting a list of recommendations for arbitrators to facilitate the arbitration process. Defendants maintain that this action bolsters their claim that they tried to arbitrate their dispute over the assessed amount of withdrawal liability but were frustrated and divested of their right to initiate arbitration. Thus, defendants argued that the clock to do so should be reset. Operating under this belief, defendants moved to compel arbitration. The court was not persuaded. It held that defendants failed to timely initiate arbitration proceedings. “The statutory text…makes clear both the arbitration deadlines and the consequences for neglecting them. Beyond-deadline arbitration demands are improper.” Defendants’ email to plaintiffs was not interpreted by the court as a written demand for arbitration. It also rejected their “strained textual reading of their [collective bargaining] agreement.” Pointing out that the agreement incorporates ERISA’s default rules concerning arbitration proceedings for employers who wish to contest withdrawal assessments, the court ruled that defendants were negligent in timely initiating arbitration, and that the time to do so has passed. Thus, it concluded arbitration is no longer available. Defendants’ motion to compel arbitration was accordingly denied.