A New York Times article in May reported that in this year’s annual letter to investors, BlackRock Inc. Chair and CEO Larry Fink wrote that “the United States was facing a retirement crisis due in no small part to self-directed retirement financing.”[1] The New York Times article pointed to the shift from defined benefit to defined contribution retirement plans; i.e., 401(k) plans.
Under the former, employers promise their employees a fixed income for the rest of their lives, alleviating retirees’ worries about running out of money before death. In place of defined benefit pension plans, which few employers currently provide, most employers that offer retirement plans provide their workers with 401(k) benefits, which are defined contribution plans.
The principal result is that workers face uncertainty about their retirement being adequately financed since their investments are subject to market conditions that may cause them to lose value. What can compound the problem is that few workers possess sufficient financial literacy to make informed investment choices.
Fortunately for such workers, a wave of litigation has forced employers to exercise prudence in selecting and monitoring the funds in which employees are permitted to invest.[2] That obligation is derived from the fiduciary duties imposed by the Employee Retirement Income Security Act, which compels those who have fiduciary responsibility[3] over plan management to act “for the exclusive purpose of providing benefits to participants and their beneficiaries,” and “with care, skill, prudence, and diligence” in the performance of their duties.[4]
Unfortunately, efforts to protect participants in retirement plans from being misled about their investment options when they retire have not succeeded, as recent litigation has shown. Two federal courts in Texas recently stayed the U.S. Department of Labor’s most recent attempt to impose fiduciary status on investment and insurance salespeople with whom retirees invest their retirement savings. These rulings strip away the protections that ERISA provided while those savings were accumulating the minute the employee retires, with the potential for dire consequences.
Courts have found that ERISA’s fiduciary duties include an obligation not to mislead plan participants, which includes an affirmative duty to communicate information that the plan participant or beneficiary needs to know to protect their rights, even if there is no specific inquiry.[5]
Taking that principle into consideration, and out of concern that the protection of participants in ERISA-governed retirement benefit plans should continue during their retirement, the DOL in 2016 issued a regulation imposing fiduciary responsibility on financial services organizations with whom retirees invest their 401(k) savings. The DOL’s intent was to overhaul a regulation issued shortly after ERISA’s enactment[6] that addressed who is an investment advice fiduciary, which did not encompass individuals offering one-time sales recommendations of investments.
The 2016 regulation sought to impose fiduciary status on anyone who makes a recommendation to a retirement saver “as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property.”[7] However, in 2018, this regulation was struck down by the U.S. Court of Appeals for the Fifth Circuit in Chamber of Commerce v. Department of Labor.[8]
In its opinion, the court drew a distinction between offering investment advice for a fee and sales of investments, and found the 2016 regulation exceeded the DOL’s authority because it disregarded the “dichotomy between mere sales conduct, which does not usually create a fiduciary relationship … and investment advice for a fee, which does.”[9]
After proposing a new rule and receiving comments, the DOL issued a revised rule in April, which attempted to accomplish what the 2016 rule failed to bring about.[10]
The rule, which was scheduled to go into effect Sept. 23, provided that a person would be deemed a fiduciary if that person
either directly or indirectly… makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
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is based on review of the retirement investor’s particular needs or individual circumstances,
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reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
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may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.[11]
On back-to-back days, two federal district courts in Texas stayed the rule’s effective date and effectively struck the rule. In Federation of Americans for Consumer Choice Inc. v. U.S. Department of Labor[12] and in American Council of Life Insurers v. U.S. Department of Labor,[13] two federal judges issued preliminary injunctions.
On July 25, citing the recent U.S. Supreme Court ruling in Loper Bright Enterprises v. Raimondo,[14] the U.S. District Court for the Eastern District of Texas in Federation of Americans maintained that “the Court thus owes no deference to DOL’s interpretation of ERISA.”[15] Applying the Chamber of Commerce ruling, which distinguished between “mere sales conduct and investment advice,” the district court ruled that the DOL’s regulation exceeded its statutory authority.
On July 26, in American Council, the U.S. District Court for the Northern District of Texas found that “the DOL expands ERISA’s fiduciary standard in a way not limited to ‘those already recognized as fiduciary under the common law’ and instead grants the DOL discretion to recognize a fiduciary relationship where the common law would not.”[16] Citing the Fifth Circuit’s Chamber of Commerce ruling, the court in American Council pronounced, “ERISA does not define fiduciary in functional terms.”[17]
The view of the two courts in Texas, as well as the Fifth Circuit’s opinion in Chamber of Commerce, was myopic. Numerous courts[18] have recognized that ERISA imposes fiduciary obligations not only on named fiduciaries, but on functional fiduciaries as well, who assume fiduciary status by taking on the function of “rendering investment advice for a fee or other compensation.”[18] Thus, Chamber of Commerce’s pronouncement that ERISA does not define fiduciary in functional terms is plainly wrong.
Nor does the distinction between rendering investment advice and selling a product stand up to scrutiny. There is no meaningful difference between a fee-for-service investment adviser recommending the purchase of an annuity to their client and a life insurance salesperson making the same recommendation.
Especially when it comes to financially unsophisticated retirees who are more susceptible to high-pressure sales pitches and promises of unrealistic returns, or to proposals for high-fee or high-commission investment products, investment advice and sales advice are one and the same. ERISA’s fiduciary duties are in the statute to override the principle of caveat emptor.
The duty not to mislead and the affirmative obligation to offer protective advice even if it has not been requested are deeply ingrained in ERISA. Neither the Fifth Circuit nor the two district courts in Texas seem to be aware of those aspects of ERISA, and apparently view sales of investment or insurance products as the equivalent of selling a television set to a consumer. ERISA was designed to flatly reject such an analogy.
One would even expect that those engaged in selling financial services would tout their fiduciary status to bolster customer confidence. Thus, the fierce opposition to the DOL’s efforts to protect retirees and their retirement assets suggests that those who are fighting the DOL’s fiduciary rule may have a different kind of protection in mind — protecting their high sales fees and commissions — rather than doing what is best for the customer.
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Law 360 on August 14, 2024.
[1] “Was the 401(k) a Mistake?” New York Times, May 8, 2024.
[2] See, e.g., Tibble v. Edison International, 575 U.S. 523 (2015).
[3] A fiduciary under ERISA, per 29 U.S.C. § 1002(21)(A), is one who (i) … exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of assets, (ii) … 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, or (iii) … has any discretionary authority or discretionary responsibility in the administration of such plan.
[4] 29 U.S.C. § 1104(a)(1).
[5] See, e.g., Kenseth v. Dean Health Plan Inc. 610 F.3d 452, 466-67 (7th Cir. 2010) (collecting cases).
[6] 29 C.F.R. § 2510.3-21.
[7] 81 Fed. Reg. 20,946, 20,948 (April 8, 2016).
[8] Chamber of Commerce v. U.S. Department of Labor, 885 F.3d 360 (5th Cir. 2018).
[9] Id. at 374.
[10] 89 Fed. Reg. 32,122 (April 25, 2024).
[11] 89 Fed. Reg. at 32,122.
[12] Federation of Americans for Consumer Choice Inc. v. U.S. Department of Labor, 2024 U.S. Dist. LEXIS 131589, 2024 WL 554879 (E.D. Tex. July 25, 2024).
[13] American Council of Life Insurers v. U.S. Department of Labor, 2024 U.S. Dist. LEXIS133158, 2024 WL 3572297 (N.D. Tex. July 26, 2024).
[14] Loper Bright Enterprises v. Raimondo, 219 L.Ed.2d 832, 144 S.Ct. 2244 (2024).
[15] 2024 U.S. Dist. LEXIS 131589 *27.
[16] American Council, 2024 U.S. Dist. LEXIS 133158 *13.
[17] 885 F.3d at 371.
[18] See, e.g., Teets v. Great-West Life & Annuity Insurance Co., 919 F.3d 1232 (10th Cir. 2019).
