September 6, 2024
By Michelle Yau and Eleanor Frisch
The Employee Retirement Income Security Act was enacted in 1974 to address the public’s concerns that private pension plans and healthcare plans were being mismanaged and abused. We have much to celebrate as ERISA turns 50 this month.
Over the decades, ERISA has served as the most important safeguard for employee retirement savings plans and health benefits in the U.S. However, this moment also provides an opportunity to reflect on how ERISA is being tested in the courts.
Congress took a great deal of care in drafting and passing ERISA. It is the culmination of intricately planned legislation designed to address both the labor and tax components of employee benefit plans.
Over the years, Congress has amended ERISA to help meet the needs of the evolving workforce and U.S. families — adding protections like COBRA, the Health Insurance Portability and Accountability Act, and safeguards against “marriage penalties” for the pensions of married employees and their spouses.
Despite ERISA being such a robust federal law, some companies and plan providers don’t abide by it. Whether through intentional profit-seeking tactics or negligence, breaches in fiduciary duties and plan mismanagement occur regularly.
Self-dealing and fee skimming are ongoing issues in 401(k) management, particularly for proprietary plans, which are leveraged by sophisticated financial institutions, insurers, private equity companies and hedge funds.[1] A mere 10 basis points or 0.1% in additional fees can mean a windfall for the company and hundreds of millions of dollars in employee losses.
Similarly, with employee stock ownership plans — once a symbol of buying into the American dream — we continue to see less-than-honorable business owners hoodwinking employees into buying stock in their privately held companies at outrageously over-valued prices.
We have seen, firsthand, class actions lead to industrywide changes that will protect workers’ retirement savings, including a reduction of 401(k) fees and a shift toward more low-cost index fund investment options.
But ERISA’s regulatory framework is now in jeopardy after the U.S. Supreme Court’s June 28 decision in Loper Bright Enterprises v. Raimondo, which overturned the decades-old Chevron doctrine of judicial deference to federal agencies’ interpretation of ambiguous statutes. Now, the courts may play an even more important role in ensuring employees not only have access to their hard-earned retirement savings and healthcare benefits, but also to the courts to address misconduct by plan fiduciaries and administrators.
To date, ERISA has been implemented and interpreted through regulations issued by both the IRS and the U.S. Department of Labor. Given the Supreme Court’s decision to overturn Chevron, possibly jeopardizing some of these regulations, companies may have more incentive to ignore ERISA — particularly companies headquartered in judicial circuits with less-than-favorable track records of upholding pro-employee statutes. This could glut the courts with unnecessary lawsuits and potentially undo decades of bipartisan work.
Even before Chevron deference was overturned, worker protections under ERISA faced significant legal hurdles before the courts, due to corporate intervention. One particularly significant issue is arbitration clauses with class action waivers and restrictions on collective remedies, which can prevent employees from bringing meaningful claims, pursuing fulsome awards, and holding companies and plan fiduciaries accountable for misconduct or plan mismanagement to the fullest extent of the law.
Such arbitration clauses should be unenforceable because they prevent workers from exercising their statutory rights under ERISA to address plan-wide fiduciary and mismanagement issues. Yet, plan providers and fiduciaries continue to insert arbitration clauses, which deter employees from exercising their rights, and allow providers and fiduciaries to avoid accountability.
Employee and ERISA-rights advocates are cautiously optimistic, as workers have successfully addressed the enforceability of these arbitration clauses in several courts of appeal. Thus far, the U.S. Courts of Appeal for the Second, Third, Sixth, Seventh and Tenth Circuits have agreed with plaintiffs that ERISA renders arbitration agreements unenforceable.
Last October, the Supreme Court declined to review both the Tenth Circuit’s 2023 decision in Harrison v. Envision Management Holding Inc. Board of Directors,[6] and the Third Circuit’s 2023 decision in Henry v. Wilmington Trust NA, both of which held that arbitration provisions in plan agreements were unenforceable. However, arbitration enforcement cases are pending before the Ninth and Eleventh Circuits.
It is also encouraging to see ERISA evolving to anticipate the needs of today’s workers. For example, the Mental Health Parity and Addiction Equity Act, or MHPAEA, requires that procedures insurers cover for a medical diagnosis must also be covered if indicated for a mental health diagnosis, providing a critical tool to obtain gender-affirming care.
In Duncan v. Jack Henry & Associates Inc. in 2022, the U.S. District Court for the Western District of Missouri allowed a plaintiff’s claim to proceed under the MHPAEA, asserting that a plan that covers mental health treatment for gender dysphoria must also cover a gender-affirming procedure. The case has since settled.
Similarly, ERISA, with the aid of litigation, is playing an important role in mitigating emerging corporate abuse involving third-party pharmacy benefit managers, and outsized costs for employee health plans and prescription medications.
As we celebrate the 50th anniversary of ERISA, Congress should be applauded for the decades of care and research that have gone into this protective statute for worker and retiree rights. ERISA has proven to be one of the most effective laws to safeguard America’s retirees and employees.
However, much more needs to be done by lawmakers.
Unless further amendments are made to shore up ERISA — such as banning class action waivers, and identifying and codifying important regulations that are now imperiled by the Supreme Court’s Chevron ruling — profit-driven companies and plan providers will find new ways to shirk ERISA compliance and use the courts to strip away ERISA’s power to protect workers and retirees. The undoing of Chevron deference may provide them with new tools to do so.
While litigation, particularly class actions, can protect Americans’ hard-earned retirement savings, the courts should not be the endgame. ERISA is a shining achievement of bipartisan congressional efforts to protect workers and their access to health and retirement plans, but lawmakers need to regroup and continue their efforts to effectively protect America’s increasingly diverse workforce.