James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

This past week has been a pivotal week in terms of American workers and their Rights and Protections under ERISA. The DOL finally announced what many had suspected – they would not pursue their defense of their Retirement Security Rule (Rule}. When one considers the strong litigation advantage the DOL seemingly  held as a result of two prominent federal judges having issued two strong opinions supporting both the Rule itself and, more importantly, the process the DOL used in drafting the Rule, I have stated my belief that the DOL’s actions constitute a betrayal of American workers.

Admittedly a very strong strong opinion, but consider the following facts:
(1) Judge Barbara Lynn, Head Judge of the Northern District of Texas, wrote an excellent and detailed legal analysis of both the need for the Rule, especially the need to prevent the ongoing manipulative  and misleading marketing of fixed indexed annuities (FIAs) to retirees.

Anyone ever considering an annuity should always insist on receiving a properly prepared breakeven analysis, one that factors in both present value and mortality risk.Annuity agents typically refuse to provide such analyses. Fortunately, AI now provides a free means of investors gathering such information through a properly prepared AI prompt.

Don’t believe me. Try the following prompt:

“Prepare a breakeven analysis, factoring in both present value and mortality risk, on a $50,000 immediate annuity for a 65 year old (need to specify male/female), paying $1500 a year (or based on whatever interest rate you want), based upon a normal life expectancy.”

What a properly prepared breakeven analysis typically exposes is that the odds are heavily against the annuity owner breaking even, i.e., receiving a commensurate return, a return of their original investment. Put another way, a breakeven analysis typically shows that an annuity is a bet, a bad bet, one which results in the annuity issuer typically receiving a significant windfall at the annuity owner’s expense. Equity law is a cornerstone of fiduciary law, requiring full disclosure and fair treatment of an investor. Annuities typically do neither.

Equally troublesome was the DOL’s announcement that it intends to propose a new fiduciary Rule in early 2026. A basic rule of litigation is maximize the strength of your case whenever possible. The DOL had two exceptional opinions from well-respected federal judges supporting the DOL’s arguments and the DOL just wasted the opinions. I have argued that the two judges’ opinions were like holding five aces in a poker game, and the DOL just folded. In my mind, wasting the two strong opinions and the seeming advantage they could have provided going  forward constitutes a betrayal of American workers unless and until the DOL explains its action. At a minimum, the judges’ opinions would have put the annuity industry on the defensive.

(2) The annuity industry would probably argue that annuity investors can purchase a rider that does guarantee a return of their principal…for yet another fee, typically in the range of 1 percent. Keep in mind that both the DOL and GAO have published their findings on the cumulative impact of costs/fees on an investor. Their findings – over 20 years, each additional 1 percent in costs/fees reduces an invetror’s end-return by approximately 17 percent. With an annuity’s regular annual cost/fees typically in the 2 percent range, a rider fee of 1 percent would result in a projected loss in end-return of 51%, resulting in yet another advantage in favor of the annuity issuer at the annuity owner’s expense.

As if the DOL’s betrayal was not enough, Republican Congressman Randy Fine has introduced the “ERISA Litigation Reform Act,” calling for “strengthening” of pleading standards in ERISA actions. On first glance, my immediate reaction was that Congressman Fine must not be aware that Rule 9 of the Federal Rules of Civil Procedure clearly states that plaintiffs are not required to plead a defendant’s state of mind with specificity since no one can know someone’s thought processes. With regard to a defendant’s thought processes, general allegations are sufficient.

But Congressman Fine does not stop there. His bill also seeks to restrict the plan participants’ access to discovery, while at the same time requiring greater specificity on alleged fiduciary breaches.

I would argue that Congress Fine’s staff did not do their due diligence before arguing for greater specificity without allowing any discovery. I would suggest that Congressman Fine’s staff is guilty of the same frivolous activity that the Congressman falsely accuse plaintiffs of doing. Numerous courts have handed down decisions supporting the necessity of some discovery in connection with ERISA actions, as well as the availability of methods by which courts can prevent onerous and unnecessary costs. For example:

• (1) “Discovery holds the promise of sharpening this process-based inquiry – one that plaintiffs could not reasonably be expected to detail without access to the fiduciaries’ internal considerations.”
  Forman v. TriHealth, Inc., 40 F.4^th 443 (6th Cir. 2022)
  
• “It is implausible to expect that a plaintiff will have personal knowledge of the details regarding the internal processes by which fiduciaries make decisions…ERISA plaintiffs generally lack the inside information necessary to make out their claims.in detail, and thus cannot be held to a heightened standard of pleading.”
  Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009)
  
• Plaintiffs cannot reasonably be expected to know the details of the fiduciaries’ internal investment
  deliberations before discovery, which “resides uniquely with defendants.”
  Leber v. Citigroup 401(k) Plan Inv. Comm., 2014 WL 4851816 (S.D.N.Y. Sept. 30, 2014) (Judge Sidney H. Stein)
• “[i]nternal fiduciary process is normally in the sole possession of the defendant. ERISA plainfiffs face “inherent information asymmetry ”
  Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 332-333 (3d Cir. 2019)
  
• “Plaintiffs” cannot plead “the inner workings of fiduciary decision-making “ without discovery.
  Hughes v. Northwesytern Univ., 83 F.4th 615, 629 (7th Cir. 2023).

Finally, to understand the strength of my arguments, one would need to read both Judge Lynn’s and Judge Stewart’s opinions. both of which are well reasoned and detailed. Judge Lynn’s opinion is Chamber of Commerce of the United States v. Hugler, 231 F. Supp. 3d 152, 190 (N.D. Tex. 2017). Judge Stewarts dissenting opinion on the 5th Circuit’s decision to stay the Rule is American Council of Life Insurers et al v. Hugler, Fifth Circuit Court of Appeals Case No. 17-10238 (3/15/2018).The decision can be downloaded at the Fifth Circuit’s web site.

And finally, before I posted this post, I started a poll on LinkedIn. The question was simple;
“Why do you think the DOL suddenly decided not to pursue an appeal in the Retirement Security Rule case? The options were A. They were afraid they would prevai or B. they were afraid they would lose. Thus far, 74 percent of the respondents have voted for option A. Interesting.

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