United States: Benefits - 2024 Highlights and 2025 Outlook

2024: HIGHLIGHTS

ERISA Fiduciary Rule

The Department of Labor (DOL) has struggled mightily for the past 14 years to issue a regulation with respect to fiduciary status under ERISA that can withstand judicial scrutiny and has been defeated yet again in 2024, at least for now, in the District Courts of Texas. Each of the courts in Federation of Americans for Consumer Choice Inc. v. United States DOL¹ and American Council of Life Insurers v. United States DOL², respectively, have stayed the DOL’s “fiduciary rule,” which was scheduled to take effect in September 2024.

The DOL’s repeated efforts over the years to revise the regulatory definition of a “fiduciary” have been met each time with fierce opposition. The latest iteration of the rule, issued by the agency in May 2024, would broaden the definition of “investment advice” (and thus who is an investment advice fiduciary under ERISA) and add complex requirements to certain prohibited transaction exemptions used by insurers and investment advisers. The stays by the Texas courts, like several in the past, create uncertainty regarding the fiduciary status of insurers and other parties selling financial products and the manner in which they are permitted to comport their businesses. The DOL has appealed the stays to the Fifth Circuit, but, in the meantime, the industry must cope with uncertainty, and, with Trump’s election, the ultimate prognosis for the rule looks grim.

ESG

In 2022, the DOL under the Biden Administration issued amendments to the rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,”³ known as the “ESG rule.” The Biden ESG rule overturned guidance from the Trump Administration in 2020 that forbade plan fiduciaries from utilizing “non-pecuniary” factors in investment decisions and, instead, permitted, but did not require, fiduciaries to consider these factors. Twenty-six Republican state attorneys general, a Liberty Energy subsidiary, and an energy trade group challenged the rule in the Northern District of Texas.⁴ After the Texas District Court upheld the rule, the plaintiffs appealed to the US Fifth Circuit of Appeals, which decided not to weigh in on the merits of the case. Instead, in 2024, the Fifth Circuit sent the case back to the lower court for a narrower ruling on whether the rule “can be squared” with ERISA or the Administrative Procedures Act.⁵

As it seems likely that the Biden ESG rule will be modified or repealed under the Trump Administration, the consideration of ESG factors by pension fund managers will become challenging. Plan fiduciary committees of defined contribution plans may be more reluctant to include ESG funds as designated investment alternatives or qualified default investment alternatives on plan menus out of concern about litigation risk.

Lifetime Income Products for Defined Contribution Plans

With the general shift in the US retirement landscape from defined benefit pension plans to 401(k) plans, and the resulting transfer of investment and longevity risk from plan sponsors to participants, the market has responded with the development of a variety of products designed to provide 401(k) participants with protected income for their remaining lives in retirement. Over the past several years, including in 2024, we have seen an accelerated proliferation of products, which include, among others, single premium immediate and deferred annuities purchased at retirement with assets in a participant’s account balance; in-plan accumulation fixed annuities purchased over multiple years; variable annuity products; and guaranteed minimum withdrawal riders to insurance contracts that allow an individual to withdraw a percentage of a specified base amount each year until assets are exhausted, at which point a fixed annuity for the balance of the individual’s life may become payable. Additionally, in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Congress created a new fiduciary safe harbor for choosing an annuity provider of “in-plan” annuities, which has given some plan fiduciary committees greater comfort in selecting these products for their plans. We expect to see continued growth in the range and sophistication of these products. (Read more on this in Lifetime Income Products in CITs on the Rise.)

Executive Compensation/Non-competes

To the relief of many employers, a federal district court (yet again in Texas) ruled in August 2024 that the Federal Trade Commission’s (FTC) non-compete rule is unlawful and may not go into effect on its intended effective date (September 4, 2024) or thereafter. (The final rule was issued by the FTC on April 23, 2024.) The stay applies nationwide.

This development is significant as the rule would have banned nearly all non-compete agreements between employers and employees. Under the final rule, existing non-competes (i.e., those that were in place prior to the proposed effective date of September 4, 2024) for senior executives would be permitted to remain in force, but employers would be prohibited from entering into new non-competes with senior executives after the effective date. (Workers who are in policy-making positions and whose annual compensation is more than $151,164 would be considered executives under the rule.)

The final rule would have had significant consequences in the area of executive compensation as, inter alia, it would have prohibited conditioning the payment of severance upon compliance with a post-employment non-compete and providing for the clawback or forfeiture of compensation (including equity) on account of a violation of a post-employment non-compete. (There was an exception in the final rule for certain non-competes entered into as part of a bona fide sale of a business.) Commentators had urged employers to consider entering into new or revised non-competes with their executives prior to the rule’s effective date.

However, given that the nationwide stay was entered into prior to the effective date, we expect most employers to take a wait-and-see approach with regard to the final rule and not make any changes to their compensation arrangements based on the final rule until the judicial process is completed. (The FTC has filed an appeal, but it is not clear, with the new Administration, whether that appeal will be pursued. (See further below.)

Health and Welfare Plans

Litigation. A proposed class action was filed earlier this year against Johnson and Johnson (J&J) and its Pension & Benefits Committee. It alleges violations of fiduciary duties in managing prescription drug benefits for participants in its employer-sponsored medical plans and in selecting its pharmacy benefits manager (PBM). It also alleges failures to engage in a prudent process by negotiating lower prices with the selected PBM, considering contracting with a different PBM, using an alternative PBM approach, or carving out their specialty drug program from the PBM contract. This case suggests an increasing focus by plaintiffs on health plans, health plan fiduciaries, and the rising costs of health care. (Read more on this class action in our Legal Update “Health Care Plans and Pharmacy Benefit Managers Targeted in Class Action.”)

PBMs have been the subject of congressional hearings and a Federal Trade Commission probe begun in 2024 on account of concerns with respect to their market power and effect on pricing and availability of drugs in the market. Regardless of the result in the J&J case, we expect further focus on this industry by Congress and the applicable regulators.

Regulation. While we did not see the sweeping health care legislation we have seen in prior years, there were still many regulatory updates in 2024. These included final regulations under the Mental Health Parity and Addiction Equity Act, which in some cases clarify existing standards and in other cases apply new ones entirely—in particular, expanding the requirements for nonquantitative treatment limitation analyses. The HIPAA Privacy Rule was also amended effective June 25, 2024 (though in many cases with delayed compliance dates), with changes primarily related to reproductive care. A change in Administration will bring a new set of eyes and new perspective to regulations applicable to health plans and will likely result in a flurry of regulatory activity. (See further below.)

For more on recent changes affecting health and welfare plans, see our recent Legal Update “United States: Health and Welfare Hot Topics.”

Qualified Plans

Litigation. 2024 saw the usual parade of excessive fee cases but had some interesting new kids on the block, among them challenges to (i) pension risk transfer transactions, and (ii) the use of forfeitures to fund employer contributions.

Pension Risk Transfers. Class actions were filed in 2024 against a number of large companies, challenging their pension risk transfer transactions (PRTs), pursuant to which liabilities for participant pension plan benefits were transferred to an insurance company. The common denominator among the cases is Athene Life and Annuity Company (Athene).

In a PRT transaction, the choice of insurer and terms of the insurance contract are subject to ERISA’s fiduciary duties. Plaintiffs allege in each case that the plan fiduciaries breached their duty of prudence to participants by failing to select the “safest” available annuity provider. Plaintiffs assert this even though the chosen annuity provider, Athene, has yet to fail to make required payments. Plaintiffs also allege in several cases that defendants engaged in fiduciary self-dealing (breaching their duty of loyalty) by selecting the lowest cost annuity provider in order to maximize the recovery for the plan sponsors.

Motions to dismiss have been filed in a number of cases, but no decisions have yet been rendered.

Use of Forfeitures to Fund Contributions. Federal courts have begun to issue conflicting decisions on the spate of lawsuits filed in 2023 and 2024 regarding the permissibility of using 401(k) plan forfeitures to fund employer contributions. While the IRS permits forfeited funds to be used to pay plan expenses or to fund employer matching contributions, plaintiffs in recent cases have argued that 401(k) plan fiduciaries have breached their ERISA fiduciary duties by allowing the plan sponsor to use forfeitures to fund employer contributions instead of reducing administrative fees otherwise borne by plan participants. So far, at least three of these suits (filed in the Eastern District of Virginia, Northern District of California, and Southern District of California) have been dismissed at the pleading stage, while at least two others (filed in the Northern and Southern Districts of California) have been allowed to proceed. With several pending cases on the same issue, 2025 will see more developments on the use of forfeitures to fund employer contributions.

Regulations and Other Agency Guidance. In July 2024, the IRS issued long-awaited final regulations governing the required minimum distributions that must be taken from retirement plans. These regulations incorporate and expand on required minimum distribution provisions in the recent SECURE and SECURE 2.0 Acts of 2019 and 2022, respectively. The IRS has also begun issuing guidance for plan sponsors on other provisions of the SECURE and SECURE 2.0 Acts. For example, it published guidance for plan sponsors on making matching contributions to defined contribution plans based on employees’ eligible student loan payments and guidance regarding the participation of long-term, part-time employees in 401(k) and 403(b) plans.

2025: OUTLOOK

With a new Administration entering the White House in January 2025, we can expect a number of changes in direction with respect to ERISA, executive compensation, and employee benefit matters.

DOL and FTC Regulations

Notwithstanding the appeals filed by the DOL and FTC with respect to the ERISA Fiduciary Rule and the FTC ban on non-competes, these rules are considered to be on life support and commentators suggest that the Trump Administration will “pull the plug” rather than take steps to resuscitate them. The DOL under Trump is also expected to modify or outright repeal the Biden ESG Rule, which, as noted above, permitted, but did not require, ERISA plan fiduciaries to consider ESG factors in making investment choices. Even prior to the rule’s repeal, we expect that plan fiduciary committees of defined contribution plans may be more reluctant to include ESG funds as designated investment alternatives or qualified default investment alternatives on plan menus out of concern about litigation risk.

Alternatives Investment Products for Defined Contribution Plans

ERISA fiduciaries have had concerns regarding the permissibility of providing 401(k) plan participants with access to direct or indirect investments in “alternative” asset classes (e.g., private equity, private credit), notwithstanding the eagerness of asset managers to offer such investments to them. The prior Trump Administration viewed providing retirement plan investors with access to private markets in a favorable light and, in 2020, issued an Information Letter⁶ stating that it is consistent with ERISA’s duty of prudence for plan fiduciaries to offer a professionally managed, multi-asset class fund with an allocation to private equity. We expect that the second Trump Administration will maintain the same position and will not present any regulatory roadblocks discouraging the adoption of these products by plan fiduciaries for their 401(k) plans either as a designated investment alternative or, more commonly, as a part of the glide path of a custom target date fund. We therefore anticipate that the interest and demand for these products will continue to grow.

Health and Welfare

Then-candidate Trump, during the debate with Vice President Harris, stated that he had “concepts of a plan” to address the Affordable Care Act (the “ACA” or “Obamacare”), legislation that he had promised in 2016 to repeal. Most commentators do not believe he will pursue a complete repeal, and President-elect Trump recently commented that he has never said or thought about ending the ACA. That said, he or his Administration may pursue prior goals, such as allowing insurers to compete across state lines, as well as new initiatives such as mandating coverage of in vitro fertilization treatments in private and government plans; enacting legislation to facilitate certain health care arrangements known as “association health plans”; and generally focusing on measures to increase transparency, choice, and affordability. It is also considered likely that President-elect Trump will modify Biden-era regulations under Section 1557 of the ACA, which prohibit employer group health plans from discriminating based on protected characteristics in covered programs or activities, and which currently extend to protect gender identity.

Qualified Plan Class Actions

Finally, we can expect to see class action challenges continue with respect to broad-based retirement plans and possibly increasingly with respect to health and welfare plans.

Back to United States: Employment & Benefits – 2024 Highlights and 2025 Outlook

¹See No. 6:24-cv-163-JDK (E.D.Tex. July 25, 2024).
²See No. 4:24-cv-00482-O (N.D.Tex. July 26, 2024).
³See 87 Fed. Reg. 73822.
⁴See Utah v. Walsh, 2:23-CV-016-Z (N.D.Tex. Sept. 21, 2023).
⁵See Utah v. Su, 2:23-CV-16 (5th Circ. July 18, 2024).
⁶See DOL Information Letter (June 3, 2020).