Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans


Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans

The Overreaction to the End of Chevron Deference

flood gates

KEY POINTS:  (1) The end of Chevron deference should serve as a welcome restraint on regulators like the Department of Labor to stay within the bounds of the ERISA statute.  The overreach of DOL’s new fiduciary rule is a good example.  

(2) The predictions of an increase in regulatory litigation and chaos is likely overblown, as every significant new regulation is already litigated.  Litigation abuse remains a problem, but the key threat to plan sponsors is not occasional litigation over administrative regulations.  It is the constant barrage of frivolous fiduciary-breach lawsuits filed by the trial bar, who sue without regard to a plan sponsor’s good faith reliance on regulatory guidance. 

By Daniel Aronowitz

The Supreme Court’s decision to end the 40-year-old Chevron doctrine’s deference to regulators’ interpretation of vague statutes has been met with hyperbole.  In dissent, Justice Kagan predicts a “massive shock to the legal system.”  Justice Jackson predicts a “tsunami of lawsuits” against federal agencies with the “potential to devastate the functioning of the Federal Government.”  And leading ERISA defense lawyers immediately lined up to be quoted in a Pension & Investments article forecasting that the end of Chevron deference will open “[t]he litigation floodgates.”  

As much as these predictions would help the revenues of major ERISA law firms, the response to the Supreme Court’s decision is an overreaction and the predicted fallout is likely overblown.  The truth is that the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, No. 22-451 (U.S., June 28, 2024), was correctly decided.  It restores the proper role of the judiciary to interpret the law, and puts a needed brake on regulatory overreach by the administrative state.  It will serve as a welcome restraint on regulators trying to rewrite laws without Congressional legislation.  

As to the predictions of increased litigation and legal uncertainty, how does that change from our current state of play?  Name one new DOL regulation that is not already challenged in litigation.  You can’t, because hyper-litigation is the current state of affairs.  And we already live in an era in which politically motivated parties forum shop to find judges sympathetic to their causes.  It is no accident that the ESG challenge was filed in the Fifth Circuit.  Moreover, well over 95% of all fiduciary litigation is filed by the trial bar having nothing to do with, or in spite of, DOL regulations.  The current fever pitch of fiduciary litigation largely involves attacks on the discretion and judgment of plan fiduciaries alleging breaches of fiduciary duty and loyalty.  The fall of Chevron deference will only affect the tiny percentage of litigation involving DOL itself, and the only change will be that the playing field will be leveled without deference to the regulator’s interpretation of the law.  

The hysterical response to the end of Chevron deference should be met with a proper dose of circumspection.  The fallout of Chevron will be less about increased litigation, but more about forcing Congress to draft better statutes with more policy specifics, and requiring regulators to be more careful in following statutory authority.  That is a better world than when Presidential administrations immediately change the regulations of the previous administration – like the flip-flopping of the constantly changing ESG rule.  Or when agencies use regulations to enact policy priorities that are not supported by statutory authority – like the new fiduciary rule for IRA rollovers. 

The following are three thoughts that attempt to get past the hyperbolic response to the Loper Bright decision, starting with why the decision was correct on the merits.

KEY POINT #1:  The Loper Bright decision was correctly decided.  

Congress frequently passes regulatory statutes that contain ambiguities and gaps.  It can happen for many reasons.  Some statutes have sloppy drafting.  Sometimes Congress consciously wants the administering agency to fill in aspects of the legislative scheme.  In other instances, the provision may give rise to an issue the enacting Congress could not have anticipated.  In other laws, a statutory phrase may have more than one reasonable reading, and Congress has not chosen among them.  The question thus arises:  who decides which of the possible readings should govern?  We thus need a default rule for interpreting a statute with a gap or ambiguity.  

For the last forty years, the default rule was that the choice of deciding a vague statute fell to agencies, with courts broadly deferring to their judgments in a doctrine called Chevron deference from the 1984 decision in Chevron v. National Resources Defense Council.  It was commonly known as the “Chevron Two-Step,” representing the two-part framework for reviewing an agency’s interpretation of a statute that it administers.  In the first step, the reviewing court must determine whether Congress has “directly spoken to the precise question at issue.”  The court must rigorously exhaust all “traditional tools of statutory construction” to divine statutory meaning.  When it can find that meaning – a “single right answer” – that is the “end of the matter.”  There is no deference because the court “must give effect to the unambiguously expressed intent of Congress.”  But if the court, after using its whole legal toolkit, concludes that “the statute is silent or ambiguous with respect to the specific issue” in dispute, then the court must cede the primary interpretative role.  At that second step, the court asks only whether the agency construction is within the sphere of “reasonable” or permissible readings.  If it is, the agency’s interpretation of the statute that it every day implements will control.  

The premise of Chevron deference was that agencies are staffed with experts in the field who can bring their training and knowledge to bear on open statutory questions.  Congress would value the agency’s experience with how a complex regulatory regime functions, and with what is needed to make it effective.  In addition, statutory ambiguities often involve more of a question of policy than of law.  The deference theory was that expert agencies are better at making complex decisions than the judges who lack technical expertise.  

The conservative majority on the Supreme Court, however, saw it differently.  They view the judiciary’s role is to interpret the law – not unelected bureaucrats.  The decision to strike down Chevron deference was about restoring the constitutional separation of powers:  Congress enacts the laws, and courts – not regulators – decide what it means.  Courts have the constitutional role to say what the law is.  That is straight from the foundational case of Marbury v. Madison.  The default rule for interpreting vague statutes is now the responsibility of the judiciary, and not so-called agency experts. 

From a cynical perspective, anyone who watched the federal government handle the COVID crisis would question whether regulators actually have unique expertise.  Cabinet members are usually chosen to reward political patronage, and rarely for expertise.  Expertise also implies that our regulators have good faith motives when issuing new regulations.  But we live in an era in which Presidents and the executive branch turn increasingly to the administrative state to implement priorities that they cannot enact through Congress.  Whether it is building a border wall when Congress will not (or cannot) pass immigration reform, or a new fiduciary rule for IRA rollovers, agencies have used Chevron deference to act in the improper role as legislators, issuing regulations that are not supported by legislation.  All too often, regulators like DOL have political motives that undermine any claim of administrative expertise.  The key benefit of the Supreme Court’s ruling, therefore, will be to stop the executive branch from regulatory overreach.  

Regulators will now have what the Wall Street Journal called “a harder time stretching laws to expand their power.”  Consider the new fiduciary rule.  It is hard to argue, even though many financial advisors do, with DOL’s well-intentioned premise that IRA roll-over clients should have advisors who act in their best interests.  But IRA’s are not part of ERISA’s mandate.  The DOL does not have the power to regulate IRAs.  Even if DOL’s regulation was well-intentioned, they lack the power over IRAs.  

As the Chamber of Commerce described in its amicus brief in FACC v. DOL, DOL has “impermissibly collapsed the distinction between the fiduciary duties imposed by Titles I and II of ERISA.”  ERISA Title I is generally applicable to employer-sponsored retirement plans.  By contrast, Title II is generally applicable to IRAs.  The general fiduciary duties under ERISA Title I of prudence and loyalty do not apply to IRAs under ERISA Title II – only ERISA’s prohibited transaction rules apply.  DOL’s regulation package, however, seeks to apply the Title I prudence and loyalty requirements to IRAs via the applicable prohibited transaction exemptions, e.g. PTE 2020-02.  As the Chamber’s amicus brief explains, DOL’s new fiduciary regulation “intrudes on the turf that Congress assigned” to the SEC.  The SEC’s “best interest” standard of conduct for broker-dealers declined to subject broker-dealers to the complete application of the existing fiduciary standard under the Investment Advisors Act of 1940.  

The new fiduciary rule by the DOL, therefore, is classic regulatory overreach.  In the challenge to the law, DOL is not entitled to deference.  And now that Chevron deference is over, DOL will not receive deference for its regulatory overreach.

In sum, Loper Bright was correctly decided.  As noted, we need a default rule for deciding vague statutes.  But that is the role of the judiciary, not regulators.  The benefit to plan sponsors should be a more credible interpretation of statutes.  Courts will now be required to find the best meaning of a statute, and not defer to a permissible or possible interpretation of a statute.  We may still have inconsistent interpretations by different judges.  But that is not any different than the current state of play.  Nevertheless, we at least will have a better state of play in that courts are required to find the right interpretation, not a “reasonable” interpretation by regulators with political motives.  We might not like what the courts interpret as the “right” result any more than the statutory interpretations by regulators, but it is the correct process that is mandated by the United States constitution.  

KEY POINT #2:  The hyperbolic predictions that the end of Chevron deference will open the floodgates of litigation are overblown.

Most ERISA defense lawyers have predicted a tsunami of litigation challenging every possible regulation.  But how is that different than the current state of play?  We already experience legal challenges to every significant regulation.  Consider the ESG and fiduciary regulations.  These regulations have been challenged by interest groups multiple times – as many times as Presidential administrations change the rules.  Challenges to important regulations are not new and will not change.  The only change will be that regulators like DOL will have to earn deference by persuasive arguments.  DOL will be no different than any other litigants.  And that is the way it should be. 

The overwrought predictions of an onslaught of litigation misses the larger point that we already live in a world of frivolous litigation.  But the current state of rampant litigation abuse rarely is about challenging regulations.  Most ERISA enforcement is prosecuted by the trial bar, not DOL.  DOL has allowed the trial bar to be the primary enforcer of fiduciary law in America.  DOL files well less than five percent of all fiduciary lawsuits on an annual basis.  The trial bar files lawsuits irrespective of whether plan sponsors relied in good faith on DOL regulations.  For example, the seven plan forfeiture challenges fail to mention the applicable Treasury regulations that support the actions of plan sponsors, but the new pension risk transfer fiduciary-breach cases rely on a 1995 DOL regulation because it supports their novel argument.  These lawsuits are filed as part of a trial bar business model irrespective of regulatory authority.  

The legal uncertainty and unpredictability faced by plan sponsors is not the result of occasional challenges to DOL regulations or the loss of deference to regulators.  The litigation problem faced by plans sponsors stems from the abuse of the legal process by the trial bar.  The trial bar systematically targets plan sponsors in approximately five or more class action breach of fiduciary lawsuits a month.  Their lawsuits target the discretion and judgment that should be afforded in fiduciary prudence.  If we want to counter litigation abuse, the easiest path would be to give plan fiduciaries the type of business judgment rule that applies to directors and officers of public companies.  The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.  If fiduciaries were given the presumption that they acted in good faith like directors and officers of public companies, most litigation would go away.  But the way to achieve the business judgment rule for plan fiduciaries is through Congressional legislation.  Painful to achieve, but worth the effort.

KEY POINT #3:  Congress will need to draft more explicit statutes or expressly delegate authority to interpret certain statutes, and regulators like the DOL will need to work more closely with Congress.  

The end of Chevron deference will force Congress to draft better statutes.  They will need to issue statutes with more policy specifics.  Statutory clarity will be a benefit to plan sponsors.  Moreover, the Roper Bright decision held that Congress can provide explicit instructions that any statutory gaps or ambiguities will be assigned to the courts or the agency.  Congress can expressly delegate to regulators to afford the regulatory flexibility that the Chevron deference doctrine previously provided.  Congress makes the laws, and they are in charge of who they want to decide ambiguities.  But it needs to be in the statute to change the default rule that the judiciary decides what laws mean.

Finally, regulators will need to change their behavior, and that should be a good result.  Again, think back to the new fiduciary rule.  DOL knows that IRAs are under the province of the SEC.  DOL nevertheless continues the power grab by issuing the new fiduciary regulation anyway.  It resulted in immediate challenges, and DOL will likely lose (again).  But it is a massive waste of resources from all parties in the process.  The end of Chevron deference will benefit plan sponsors if it causes regulators to refrain from regulatory overreaches like the new fiduciary rule.  We are not predicting that, but at least the judicial system will be ready to serve as the constitutional check in the proper balance of power.

Disclaimer:  The Fid Guru Blog is intended to provide fiduciary thought leadership and advocacy for the plan sponsor community in areas of complex fiduciary litigation.   The views expressed on The Fid Guru Blog are exclusively those of the author, and all of the content has been created solely in the author’s individual capacity.  It is not affiliated with any other company, and is not intended to represent the views or positions of any policyholder of Encore Fiduciary, or any insurance company to which Encore Fiduciary is affiliated.  Quotations from this site should credit The Fid Guru Blog.  However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance.  This blog does not intend to provide legal advice.  You should consult your own attorney in connection with matters affecting your legal interests.

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