401k Fiduciary Warning - This is How The Supreme Court’s Chevron Decision Might Impact Retirement

401k Fiduciary Warning - This is How The Supreme Court’s Chevron Decision Might Impact Retirement

January 22, 2024

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401k Fiduciary Warning - This is How The Supreme Court’s Chevron Decision Might Impact Retirement Plans
by Christopher Carosa January 23, 2024

They say if you give a man a fish; you feed him for a day. But if you teach a man to fish; you feed him for life. What do fish have to do with retirement? Plenty if you’re paying attention to the Supreme Court.

Last week, the nation’s highest court heard arguments involving the National Marine Fisheries Service. It seems they don’t appreciate the government requiring fishing companies to pay certain regulatory costs. This concept is allowed under a 1984 Supreme Court decision involving Chevron. Overturning Chevron will not only impact the fishing business, but all regulated activities, including the retirement plan industry.

The issue stems from the manner in which courts determine the meaning of a particular statute. Many times, laws are not as clear as they seem.

“Legislation that becomes law often includes unique definitions, processes, required disclosure, compliance requirements, etc,” says Jack Towarnicky, Of Counsel at Koehler Fitzgerald, LLC in Powell, Ohio. “Statutes are applied by the courts to specific facts using a method known as ‘statutory construction.’ Many words used in a statute have a plain, obvious meaning. Other times, there is ambiguity where courts apply the traditional canons of construction. Courts will vary how they apply statutory construction, varying between: ‘Purposivism’ (using extraneous materials from the pre-enactment phase of legislation, including early drafts, committee reports, and white papers), and/or ‘Textualism,’ (using only the ordinary meaning of the legal text, no consideration to any other information such as legislative drafts, intent, etc.)”

Today, how a court deals with this ambiguity relies on a decades-old rule by the U.S. Supreme Court.

“When a court interprets an ambiguous federal law, a 1984 Supreme Court precedent favors an executive agency’s interpretation,” says Peter Gulia, a shareholder of Fiduciary Guidance Counsel, a nationwide law practice based in Philadelphia, Pennsylvania. “The Supreme Court reasoned that Congress expects an ambiguity in a law Congress enacted to be filled-in with the interpretation of the agency Congress empowered to administer that law. A court defers to the agency’s interpretation made in a rule or regulation, if it has some reasoning. Judges and lawyers call this Chevron deference.”

Even though the original case dealt with a narrowly defined industry, its concept has been embraced to include all regulatory activities, regardless of their relationship with the original case.

“In 1984 the Supreme Court in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984) upheld the regulatory definition of ‘new or modified major stationary sources’ which permitted certain plants to satisfy air pollution rules,” says Albert Feuer at the Law Offices of Albert Feuer in Forest Hills, New York. “Chevron deference means that if Congress has delegated to an administrative agency, the authority to interpret a statute, there are multiple reasonable interpretations of the statute, then the courts will defer to a reasonable interpretation by the agency. The Supreme Court will decide the extent to which such deference continues in the cases you discussed. Many expect the Court to limit such deference, but it may not eliminate such deference.”

Expecting the Supreme Court will restrict Chevron, many see repercussions in the retirement plan industry.

“And now you get to the problem,” says Lawrence (Larry) Starr, Executive VP at Cornerstone Retirement, Inc. in West Springfield, Massachusetts. “This is (potentially) so wide ranging that we have no idea what arguments would now be made against the umpteen rulings we have gotten from IRS, DOL, PBGC, SEC, etc. etc. It’s going to be a wild and crazy time!”

There are some immediate ramifications for plan sponsors and they will need to pay close attention to events as they unfold.

“If Chevron deference is reduced, it will be easier to challenge IRS and DOL regulations pertaining to employee benefits plans, as well as Department of Health and Human Services regulations pertaining to health and welfare plans,” says Feuer. “One would expect three kinds of regulations to be more easily challenged: The Required Minimum Distribution regulations issued in proposed form that incorporate the SECURE Act provisions; The plan investment regulations, particularly those pertaining to so-called ESG investments; and, The fiduciary definition regulations. I have no room for health care regulation challenges, but I hope someone will mention those attacks.”

And, indeed, someone did.

“Not sure what will happen, but I can predict the top three results: Litigation, Litigation, and more Litigation challenging agency regulations, and especially, the extensive use of sub-regulatory guidance and interpretations,” says Towarnicky. “For example, we are now working on Part 64, 64!!!!! of the DOL FAQ on Health Reform and related and subsequent health benefits legislation.”

Plan sponsors that have relied on Department of Labor interpretation may find themselves immediately at risk. Past assumptions will no longer guarantee courtroom invulnerability.

“Plan Sponsors should realize that there’s a new Sheriff in town,” says Richard Bavetz, investment advisor at Federal Retirement Consultant in Westlake Village California. “They are likely to experience an increasing amount of judicial scrutiny based on past regulatory decisions and interpretations, leading to more uncertainty in how those regulations are being applied. Agencies like the Department of Labor will need to rely more heavily on clear legal precedent rather than folly in the absence of clear prohibition. Even if they are acting in good faith in their roles as fiduciaries, Plan Sponsors run the risk of litigation due to the inevitable uncertainty that will arise. They will almost certainly see a rise in litigation overall and will need to be prepared.”

Most prominently, one particular DOL Rule might be most at risk.

“I see a near-term consequence,” says Gulia. “The Labor department’s rule-making to interpret what circumstances result in providing investment advice that makes one a fiduciary would become less powerful. In a dispute about whether a person was a fiduciary, a court could consider those questions with one’s own interpretations about what is or is not investment advice.”

Another politically popular item on the regulatory agenda may find itself exposed without Chevron to defend it.

“If the Chevron doctrine is overturned or modified, it will be more difficult for agencies to issue regulations that fill in gaps that do not fit squarely with statutory provisions,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “This likely will give rise to more litigation, and impact decisions in ongoing cases or appeals, such as the Firth Circuit review of the ESG investing rules.”

Beyond that, plan sponsors need to remain on guard in all matters.

“While it is hard to anticipate specific changes, I would anticipate increased scrutiny on regulatory interpretations,” says John Wood, attorney and founder of Grant Park Legal Advisors LLC in Chicago, Illinois. Without the Chevron defense, the courts may feel more open to critically reviewing the regulatory agency’s interpretation of the statute. This may also result in clear guidance from the courts on the interpretation of the relevant statute. Plan sponsors may need to rely on the courts’ decisions, as they will play a more direct role in shaping regulatory interpretations. The court guidance and clear legal standards reduced the level of ambiguity often found in regulatory rule-making. By following the court’s rulings, plan sponsors may have clearer legal standards, allowing them to make informed decisions regarding plan administration, compliance, and design.”

To make the procedure more agonizing, the transition away from Chevron may feel like death by a thousand cuts. But the snail-like process of the courts has its benefits.

“As court rulings are typically more stable and slower to change, plan sponsors and participants may enjoy greater stability,” says Wood. “Chevron has been criticized for allowing regulatory changes to shift with the tides of political fortune, making yesterday’s interpretation no longer applicable with today’s new political administration. In today’s highly politically polarized environment, the reduction in uncertainties and the slower, more deliberate approach offered by the court system may benefit all parties.”

In the end, after some short-term turbulence, without the Damocles Sword of changing administrations, reducing the role of Chevron in the regulatory process may make life easier for plan sponsors in the long run.

“Greater clarity, reduced regulatory uncertainty, and a more stable environment can contribute to better decision-making, compliance efforts, and overall plan management,” says Wood. “However, it’s crucial to note that the specific consequences would depend on how courts interpret and apply Chevron reversal in the context of retirement plan regulations.”

Stay tuned as it’s expected the Supreme Court will issue its final decision on Chevron this June.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA.