The DOL Promulgates the Final Fiduciary Regulation

By Joseph A. Garofolo

On April 8, 2016, the Department of Labor promulgated a final regulation regarding ERISA’s definition of fiduciary.  The final regulation becomes applicable on April 10, 2017, and is available here.  

There were a number of changes between the proposed regulation published on April 20, 2015 and the final regulation.  The Department provided a chart summarizing changes made in response to the following issues raised in connection with the proposed regulation: the distinction between education and investment advice, the applicability of the regulation to health and welfare arrangements and appraisals, whether “hire me” recommendations are subject to ERISA’s fiduciary standards, the applicability of the Best Interest Contract Exemption (the “BICE”) (a class prohibited transaction exemption) to small plans and all asset classes, disclosure requirements under the BICE, the applicability of the contract requirement to ERISA plans and arrangements not subject to ERISA (including individual retirement accounts “IRAs”), the application of the regulation to call centers, web disclosure and data retention requirements, recommendations relating to proprietary products, lifetime income products, and level fee arrangements, fee-based account conversions, bias toward products with low fees, grandfather relief, and concerns regarding regulation implementation.  The Department’s chart is available here.

Finally,  on April 8, 2016, the Department promulgated the following exemptions relating to prohibited transactions under ERISA and the Internal Revenue Code of 1986, as amended: i) the BICE (the Best Interest Contract Exemption); ii) Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; iii) Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks; iv) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks; v)
Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1; and vi) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters.  These documents can be accessed here.

While the retirement plan community continues to analyze the final regulation and its related exemptions, it is safe to say that many investment advisers and participants will be affected by the significant changes made to the Department’s interpretation of “investment advice” as that phrase is used in ERISA § 3(21)(A)(ii).  

Research Reveals Disparities Between Disability Claims and Other Types of Benefits Litigation

By Joseph A. Garofolo

The Department of Labor recently cited ERISA Benefits Litigation: An Empirical Picture, 28 ABA J. Lab. & Emp. L. 1 (2012) (“ERISA Benefits”), in its proposed regulation regarding disability benefit plan claims procedures.  See 80 Fed. Reg. 72014, 72016 n.8 (Nov. 18, 2015).  ERISA Benefits is a study by Sean M. Anderson, a professor at the University of Illinois College of Law, that most ERISA practitioners—regardless of whether they focus on disability claims—will find fascinating.

Professor Anderson analyzed data relating to ERISA benefits lawsuits filed between 2006 and 2010.  He found that disability suits accounted for 64.5% of benefits litigation whereas lawsuits involving health care plans and pension plans accounted for only 14.4% and 9.3%, respectively.  ERISA Benefits at 7.  According to the study, defendants asserted failure to exhaust in 27.8% to 40.4% of lawsuits in which disability benefits were not involved.  Id. at 11.  In contrast, failure to exhaust was asserted as a defense in only 14.7% of the disability cases.  Id.  

Professor Anderson has indicated that he intends to further analyze the data that he has collected.  The author believes that analysis of class action benefits litigation, claims brought by providers where numerous medical claims are litigated in a single lawsuit (often brought by providers), and the amount of monetary recovery sought in different types of benefits claims would be of interest to ERISA practitioners and policymakers.

Designation of a Named Fiduciary

By Joseph A. Garofolo

ERISA §§ 402(a)(1) and (2) require a plan to designate, or provide a procedure for designating, one or more named fiduciaries “who jointly or severally shall have authority to control and manage the operation and administration of the plan.”  The designation of a named fiduciary or fiduciaries can become important in 401(k) plan fiduciary breach and other ERISA litigation because it effectively forecloses the person or persons so designated from arguing that they are not fiduciaries with attendant duties.

But how specific does the designation of a named fiduciary have to be?

Fortunately, the Department of Labor provided early interpretive guidance, now codified in 29 C.F.R. § 2509.75-5, relating to this issue.  This guidance, issued in 1975, answers three basic questions relating to the designation of named fiduciaries.

First, the Department indicated yes in response to the question of whether the designation of a committee by position or by individual satisfies the requirements of ERISA § 402(a).

Second, with regard to a collectively bargained plan, the Department explained that ERISA § 402(a) is satisfied if a “joint board is clearly identified as the entity which has authority to control and manage the operation and administration of the plan.”  29 C.F.R. § 2509.75-5, FR-2.  The Department continued that each member of the joint board would be a named fiduciary under such a situation.

And, third, the Department confirmed that a plan may name a corporation/plan sponsor as the named fiduciary.  The Department indicated that the plan instrument designating the corporation “should provide for designation by the corporation of specified individuals or other persons to carry out specified fiduciary responsibilities under the plan, in accordance with section 405(c)(1)(B) of the Act.”  29 C.F.R. § 2509.75-5, FR-3.

Early Department of Labor interpretative guidance is often a good place to start when seeking clarification regarding fundamental fiduciary responsibilities.   




ERISA’s Fiduciary Duty to Monitor

By Joseph A. Garofolo

In Tibble v. Edison International, 135 S. Ct. 1823 (2015), the Supreme Court clarified the applicability of ERISA’s statute of limitations to the fiduciary duty to monitor.  The plaintiffs alleged that fiduciaries violated the duty to monitor investments by continuing to offer retail-class mutual funds to 401(k) plan participants as opposed to institutional-class funds with lower fees.  The Court held “that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones” and that a breach of the duty to monitor occurring within ERISA’s statute of limitations was sufficient to hold that plaintiffs’ fiduciary breach claims were not time barred.  Id. at 1829.

While Tibble involved the duty to monitor 401(k) plan investments, another important fiduciary duty to monitor exists with regard to the appointment of plan fiduciaries and the selection of service providers to plans.  The Department of Labor has explained the following:

At reasonable intervals[,] the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.  No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.

 29 C.F.R. § 2509.75-8, FR-17.

The Department has made it clear that the “reasonable intervals” standard also applies to monitoring plan service providers.  See

Notably, the duty to monitor is part of a fiduciary’s obligations under ERISA § 404(a)(1).  Indeed, consistent with the Supreme Court’s analysis in Tibble, some courts have held that it is part of the duty of prudence.  However, the duty to monitor should not be confused with co-fiduciary duties under ERISA § 405(a)—that section requires the elements of one of its subsections (e.g., knowledge of a fiduciary breach by another without making reasonable remedial efforts) whereas those elements are not required to be satisfied in order for a breach of ERISA § 404(a)(1) to occur.

Notwithstanding the difference between the duty to monitor and co-fiduciary duties, it is critical for fiduciaries to understand both, as ERISA is not forgiving to fiduciaries who are unware of their responsibilities.


Administrative Agency Interpretation, the Affordable Care Act, and ERISA

By Joseph A. Garofolo

On June 25, 2015, the Supreme Court decided King v. Burwell, 576 U.S. ____, 192 L. Ed. 2d 483 (2015).  The Court held that the Patient Protection and Affordable Care Act (the “Affordable Care Act”) permits tax credits in states in which the federal government has established health care exchanges.  While most of the focus of commentators, understandably, has been on this substantive result, King is also interesting because of the Court’s analysis of Chevron deference.

Chevron deference is the principle articulated by the Court in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), that, under certain circumstances, courts must defer to reasonable interpretations of agencies when a statute is ambiguous.  In King, Chief Justice Roberts, writing for the Court, explained that Chevron deference assumes that Congress implicitly delegated authority to an agency to interpret “statutory gaps.”  192 L. Ed. 2d at 493 (internal quotations and citation omitted).  But, in “extraordinary cases, . . . there may be reasons to hesitate before concluding that Congress has intended such an implicit delegation.” Id. at 493-94 (internal quotations and citations omitted).  With regard to the availability of tax credits in states where exchanges have been established by the federal government, if Congress had desired to delegate authority to an agency, “it surely would have done so expressly.”  Id. at 494.  Moreover, the Court reasoned that Congress would not likely have delegated such an important decision to the Internal Revenue Service because of its lack of expertise regarding the subject matter.  Accordingly, the Court decided King without any deference to the Internal Revenue Service’s interpretation of the Affordable Care Act.

This is not the first time that the Court has invoked what has come to be known as the “major questions doctrine.”  See Adam White, Symposium: Defining deference down, SCOTUSblog, June 25, 2015,  And although the result was necessary in King to avoid the possibility that a different administration could change its interpretation of the Affordable Care Act, it is also possible that King could signal a broader retreat from the Court’s application of Chevron deference.  See id. 

Is this likely to occur in the field of ERISA?  There are a number of places in the statute where Congress expressly delegated interpretative authority to the Secretary of Labor.  For example, ERISA § 503, which addresses the claims procedure that must be provided by employee benefit plans (including retirement and health and welfare plans), expressly grants the Secretary authority to promulgate a regulation.  Perhaps more importantly, ERISA § 505 grants broad authority to the Secretary to promulgate regulations relating to Title I.  Therefore, the major questions doctrine is not likely to play a role with regard to the Secretary’s interpretative authority as it pertains to most significant ERISA issues.

Finally, one quick note regarding a previous post is necessary to close the book for now on King.  The prior post discussed a method of predicting the outcome of Supreme Court cases based on the number of questions asked by the Justices to each side.  This method predicted the wrong outcome in King.  However, in fairness, the professor who has been collecting data on the method had placed the case in the toss-up category.  And Justice Roberts asked only one question.  So, from an empirical standpoint, the case probably does not tell us much about the ultimate ability of the method to consistently predict the outcome of Supreme Court decisions.


Latest Developments Regarding the Proposed Fiduciary Regulation

By Joseph A. Garofolo

March has already delivered several noteworthy developments regarding the proposed fiduciary rule.  By way of background, the Department of Labor sent a proposed rule regarding the definition of fiduciary to the Office of Management and Budget (“OMB”) on February 23, 2015.  Although the proposed rule has not been made public yet, the Department provided a glimpse of what it might look like in frequently asked questions available on the Department’s website.  For example, the Department indicates that it is seeking “a balanced approach that . . . ensures that [investment] advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.”  Further, the Department states that the proposed rule “will not prohibit common compensation practices, such as commissions and revenue sharing[,]” and will include proposed exemptions to restrictions under ERISA and the Internal Revenue Code (the “Code”).  Review by OMB is a first step and will be followed by the notice-and-comment process under the Administrative Procedure Act.

As to the new developments, first, nine Republican members of the U.S. Senate Committee on Health, Education, Labor, and Pensions signed a March 10, 2015 letter to the OMB Director generally expressing concern that the proposed rule will be similar to the 2010 proposed rule that was withdrawn by the Department in 2011.  The letter requests that OMB consider 11 specific concerns of the Senators.  Most of the concerns revolve around perceived failures of the Department to coordinate with the Securities and Exchange Commission (“SEC”) and other agencies and the possibility that the proposed rule could increase the cost of investment-related services or reduce the availability of such services to ERISA plans and individual retirement accounts (“IRAs”).  The letter is available here.

Second, Secretary of Labor Thomas Perez was questioned about the proposed fiduciary rule during a March 17, 2015 budget hearing before the U.S. House of Representatives Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies.  Republican Hal Rogers, the Chairman of the Committee on Appropriations, asked Secretary Perez “how ERISA gives DOL jurisdiction over an individual’s relationship with a personal investment advisor.”  In response, Secretary Perez briefly explained the roles of the Department and the SEC and referenced a letter that he had sent the previous day responding to an inquiry from the Chairman of the House Committee on Education and the Workforce.  Secretary Perez also stated that “the law gives DOL the authority to define a fiduciary under the tax laws in the same way as the ERISA definition.”  He further indicated that he has been involved in eight or nine meetings with SEC Chairwoman Mary Jo White relating to the proposed fiduciary rule.  A video of the hearing currently is available here (the dialogue between Chairman Rogers and Secretary Perez starts at approximately 1:21:52).

The discussion during the budget hearing highlights the potential scope of the proposed fiduciary rule and the impact that it could have not only on 401(k) and other employer-sponsored plans, but also IRAs.  The 2010 proposed regulation would have amended the definition of fiduciary for purposes of ERISA and the excise tax on prohibited transactions under Code § 4975.  Code § 4975 applies to IRAs and contains a definition of fiduciary parallel to the one found in ERISA § 3(21)(A).

Finally, several sources, including PLANSPONSOR and the American Retirement Association, are reporting that on March 17, 2015, Chairwoman White stated that the SEC will “implement a uniform fiduciary duty for broker-dealers and investment advisors where the standard is to act in the best interest of the investor.”

While the extent of further interaction between the Department of Labor and the SEC and the ultimate fate of the proposed fiduciary rule remain uncertain, it appears quite likely that the discourse surrounding the proposed rule will continue to be politically charged.