DOL Again Rewrites Regulation Defining Investment Advice Fiduciary under ERISA and the Internal Revenue Code

On April 25, 2024, the U.S. Department of Labor (DOL) published its much-anticipated final regulation re-defining its interpretation of ERISA § 3(21)(A)(ii) and Internal Revenue Code (IRC) § 4975(e)(3)(B) for when a person is a fiduciary under ERISA and the IRC on the basis of rendering "investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of [a] plan, or has any authority or responsibility to do so." The new regulation, which aligns for the most part with the proposed rule released in October 2023, replaces DOL's five-part regulatory test interpreting the statutory definition of a fiduciary investment advisor that has been in place since 1975. Unlike the proposal, however, the final rule eliminates one category (of three) of persons that the proposed rule had included as investment advice fiduciaries – i.e., persons with discretionary authority to purchase and sell securities or any investment property for a retirement investor. The preamble to the final rule states that the second proposed category, which was retained in the final rule, captures circumstances where persons with investment discretion would qualify as investment advice fiduciaries. 

The final rule, unlike the proposed rule, also expressly provides that persons who make recommendations but do not satisfy the criteria contained in the two remaining categories of persons who qualify as investment advice fiduciaries (persons who make professional investment recommendations on a regular basis to retirement investors under circumstances outlined in the regulation and persons who acknowledge their fiduciary status) are not investment advice fiduciaries. This carve-out excludes from the fiduciary definition a person who only provides investment education or a salesperson making a recommendation under circumstances that would not indicate to a reasonable investor that, inter alia, the recommendation is based on the investor's particular needs or circumstances and may be relied upon to advance the investor's best interest.

DOL's 2016 "fiduciary rule" also aimed at updating the agency's regulatory interpretation of an investment advice fiduciary but was vacated by the courts. The new regulation is also very likely to be challenged under the Administrative Procedure Act (APA) on similar grounds, and its ultimate fate will likely not be known for a while. The regulation is effective on September 23, 2024.

We will provide more information about DOL's new rulemaking and related amendments to multiple prohibited transaction exemptions in the coming weeks as we have an opportunity to digest the new regulation and exemptions as well as DOL's extensive comments and analysis in the documents' preambles. 

DOL Solicits Input on Lost and Found Retirement Savings Database

Last week, DOL issued an information collection request (ICR) seeking public input on its efforts to create and operate an online searchable database to reunite workers with lost retirement benefits, as directed by section 303 of the SECURE 2.0 Act. DOL is proposing that employers voluntarily report missing participant data and legacy information typically reported on IRS Form 8955-SSA as a separate attachment to Form 5500. A stand-alone reporting portal is anticipated.

DOL is especially interested in comments that advise on the necessity of information "for the proper performance of the functions of the agency, including whether the information will have practical utility," and that confirm the accuracy, quality, utility, and clarity of the information collected. Regulators are also looking for advice on minimizing burdens via automation and e-filing options.

Comments are due by June 17, 2024.

J&J Moves to Dismiss High-Profile ERISA Claims Challenging Drug Costs

As anticipated, on Friday, April 19, 2024, Johnson & Johnson (J&J) moved to dismiss the high-profile complaint filed in February against the company and its benefits committee alleging ERISA fiduciary violations associated with the cost the self-funded J&J Group Health Plan (the Plan) pays for prescription drugs in general and specialty drugs in particular. Lewandowski v. Johnson & Johnson, No. 24-cv-671 (D.N.J. Apr. 19, 2024) (Dkt. 40-1). Those claims, by a plan participant and putative class of similarly situated participants, allege that the Plan's fiduciaries were imprudent when negotiating drug prices with the Plan's pharmacy benefits manager, Express Scripts, Inc. (ESI), causing the Plan, J&J, and participants to pay more for drugs than they should have. In particular, the named plaintiff claims those fiduciary breaches resulted in higher out-of-pocket costs for participants and lower wages.

In their motion, the defendants argue that the claims must be dismissed for lack of Article III standing because the complaint does not allege any injury caused by the defendants sufficient to even open the courthouse doors. Relying on Thole v. U.S. Bank, N.A., 140 S. Ct. 1615 (2020) and Knudsen v. MetLife Group, Inc., No. 23-cv-426, 2023 WL 4580406 (D.N.J. July 18, 2023), appeal pending, No. 23-2430 (3d Cir.), the defendants assert that plaintiff has no standing to bring her ERISA claims because she suffered no loss under the terms of the plan, in benefits or otherwise, and did not have to pay more for drugs than the plan required. They argue that under Thole and Knudsen, which like the instant case involved plans offering fixed benefit amounts, the plaintiff's "wasting of the Plan's general assets" theory is insufficient to convey standing. According to the motion, the complaint's allegations of harm in the form of lost wages and higher premiums, co-pays, and co-insurance are too speculative.

Defendants also argue that the plaintiff failed to allege facts in her complaint sufficient to state a prudence violation under ERISA. They assert that the complaint does not plausibly allege that J&J had an imprudent process for selecting and negotiating with ESI, and that the plaintiff instead wants the court to infer imprudence based on the prices the plan agreed to pay for some drugs under the plan. Further, relying on legal precedent in retirement plan fee litigation, the defendants assert that a plaintiff must also at least allege other similar plans paid less overall for comparable drug programs, which they claim Lewandowski failed to do in her complaint. The motion also seeks to strike Lewandowski's jury demand, arguing there is no right to a jury trial for the ERISA statutory claims at issue.

The plaintiff will have an opportunity to file an opposition to this motion to dismiss, and the court may issue a decision as soon as early summer.

And in Other Health Plan Fee Litigation News...

On Monday, April 23, 2004, the U.S. District Court for the District of Connecticut dismissed an ERISA lawsuit against Elevance, Inc., finding that the trustees of the union plans who filed the case did not adequately plead that the defendants were acting as fiduciaries when they engaged in the alleged conduct at issue. Trustees of Int'l Union of Bricklayers and Allied Craftworkers Local I Connecticut Health Fund v. Elevance, Inc., No. 22-cv-1541 (D. Conn., Apr. 22, 2024). The complaint focused on defendants' alleged practices when repricing and paying network provider claims. The court held that the complaint did not contain sufficient facts showing defendants exercised sufficient authority over plan management and plan assets to render them functional fiduciaries under ERISA, focusing instead on the allegations in the complaint indicating that the defendants were bound by contract terms when paying the providers. According to the court, "[a]s alleged, Defendants are obligated to perform a task by applying the terms of a contract to pay healthcare professionals, thus contradicting Plaintiffs' contention that Defendants have discretion to be ERISA fiduciaries." Moreover, the court stated that "to the extent that Plaintiffs are challenging the contracts that Defendants entered into with the network providers, those actions seem to be 'business decisions' that do not fall under the purview of ERISA." The court did, however, reject the defendants' claim that the case should be dismissed for lack of standing, finding that plaintiffs' allegations provide for a reasonable inference that they sustained monetary harm caused by the defendants. The dismissal of the case was "without prejudice," and the plaintiffs have 30 days to file an amended complaint to try to cure the pleading defects identified by the district court.

Upcoming Speaking Engagements

Joanne will speak at the American Bar Association Joint Committee on Employee Benefits (JCEB) CLE program "ERISA: Beyond the Basics" on May 7 and at the American Staffing Association 2024 Staffing Law & Compliance conference on May 16. She will also co-present the Strafford webinar "ERISA Covered Health and Welfare Plan Administration: Compliance, Fiduciary Liability, DOL Enforcement Actions" on May 14.

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