Litigation Updates
SCOTUS Overturns Long-Standing Chevron Deference Doctrine
On June 28, 2024, the Supreme Court issued a decision (Loper Bright v. Raimondo) overturning the Chevron Doctrine, a rule that (since 1984) required federal courts to defer to federal agency interpretations of ambiguous statutes (e.g., DOL’s interpretation of ERISA). Chevron is often a feature of litigation challenging DOL regulations and in plan participant lawsuits alleging fiduciary breaches. Following the ruling, federal courts must draw their own conclusions about the correct legal interpretation of ambiguous federal statutes.
In the retirement space, the Supreme Court’s reversal of the Chevron Doctrine will have widespread consequences for our understanding of fiduciary responsibility and of the administration of retirement plans. It will be significantly harder for agencies to change policy by interpreting or reinterpreting the statutes they administer.
As mentioned previously, additional lawsuits challenging the DOL’s newly finalized investment advice rules seem inevitable in the wake of the Chevron Doctrine reversal. Other plan governance areas, for example regarding Environmental Social Governance (ESG) investing, also will be affected. In Fifth Circuit Court of Appeals Utah et al. v. Julie Su, Acting Secretary of Labor, the court sent back (remanded) the case to the district court to determine whether the DOL’s ESG rule represents the best reading of the statute or not.
Plan Forfeitures
Two California district courts came to different conclusions in plan forfeiture litigation. On May 24, 2024, the United States District Court for the Southern District of California denied defendant's motion to dismiss in Perez-Cruet v. Qualcomm Incorporated, finding that the sponsor’s exercise of discretion to use forfeitures to reduce employer contributions, rather than to reduce participant-paid administrative costs, presented a colorable violation of ERISA’s fiduciary rules. On June 17, 2024, the United States District Court for the Northern District of California granted the defendants’ motion to dismiss in Hutchins v. HP Inc., a case involving nearly identical facts/claims. Based on the latter decision, defendants in Perez-Cruet v. Qualcomm have filed a motion to reconsider.
Plan sponsors should review their plan document language regarding use of forfeitures. The rules clearly allow forfeitures to 1) pay plan administrative expenses, 2) reduce employer contributions under the plan, or (3) increase benefits in other participants’ accounts in accordance with plan terms. Including all three options in the plan document gives sponsors the greatest level of flexibility, and establishing a hierarchy of their use in the plan language would take any element of employer discretion out of play.
ESG Investing Cases
The DOL’s final Environmental Social Governance (ESG) regulations took effect January 1, 2023. ESG factors may be considered in investment selection if the fiduciary reasonably determines they are relevant to a risk and return analysis. The rules allow consideration of ESG factors in two circumstances: 1) Where a fiduciary concludes that ESG factors (e.g., climate change risk) are relevant to a risk and return analysis and 2) as a modified “tiebreaker” standard. The tiebreaker rule only matters when ESG factors do not affect the risk/return analysis and ESG factors are collateral benefits other than investment returns.
In the case, State of Utah et al. v. Martin J. Walsh and United States Department of Labor, which involved a 26-state challenge to the DOL’s ESG rule, the court found in favor of the DOL’s ESG rule. Plaintiffs recently filed an appeal of the lower court’s decision in the Fifth U.S. Circuit Court of Appeals case (State of Utah et al. v. Julie A. Su, Acting Secretary, U.S. Department of Labor United States Department of Labor.)
In another case, Spence v. American Airlines, decided on June 20, 2024, the United States District Court Northern District of Texas held for the plaintiff, denying the defendant’s motion for summary judgment. The case involved a challenge to the American Airlines 401(k) plan fiduciaries’ selection/retention of funds/fund managers that pursue “ESG goals” in proxy voting. After the court decided on this motion, the parties proceeded to a bench trial that concluded on June 27, 2024. The court found evidence that the plan’s committee did not consider the issue of the proxy voting policy of plan funds/fund managers and evidence of committee officials’ involvement in employer ESG efforts created triable issues of fact.
TDF Fiduciary Hygiene
With an appropriate investment policy statement, customized benchmarks, and thorough committee minutes, a plan sponsor defendant prevailed against claims of fiduciary violations in district court. On May 20, 2024, the United States District Court for the Northern District of California dismissed the plaintiffs’ complaint in Bracalente v. Cisco Systems, Inc., held that defendant Cisco did not violate ERISA’s prudence requirement in selecting (and retaining) a suite of BlackRock target date funds (TDFs) as the Cisco 401(k) plan’s qualified default investment alternative (QDIA). Critical in this decision: An appropriate IPS crafted (in part, at least) with a view towards potential litigation; where appropriate, explicit custom benchmarks, especially for the plan’s QDIA-TDFs; and adequate committee minutes reflecting review of fund performance and conforming to the standards adopted in the IPS.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. The material presented was created by RPAG. Securities, investment advisory, and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC (www.sipc.com). Supervisory Office: 16 Campus Blvd, Newtown Square, PA 19073. Cadence Financial Management, LLC is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies.