Second quarter 2025 review

Legislation

Nothing in budget reconciliation legislation affecting retirement policy: Budget reconciliation legislation (AKA the One Big Beautiful Bill), passed and signed into law on July 4, 2025, included no provisions affecting retirement policy. Given that most consider, with respect to this legislation, that the biggest challenge for Republican lawmakers was to find enough revenue to pay for the extension of 2017 tax cuts (and, e.g., “no tax on tips”), it is good news that they did not seek to produce additional revenue by changing the retirement savings “tax deal.”

“No tax on Social Security” workaround: This legislation does not include a provision for “no tax on Social Security” – generally, changes to Social Security are not allowed in reconciliation legislation. Instead, it provides a temporary $6,000 “Deduction for Seniors,” through 2028, phased out for single taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).

Finally, we note that provisions marginally increasing taxes paid by high earners (e.g., the 35% cap on the value of itemized deductions for taxpayers in the 37% bracket) will (at the margin) increase the value of tax-favored retirement savings.

There were, however, a number of retirement proposals introduced in Congress during the second quarter 2025:

• Republican House Education and Workforce Committee members introduce bills targeting DOL’s audit process and cooperation with plaintiffs lawyers: In April 2025, Republican members of the House Education and Workforce Committee introduced legislation requiring DOL to: (1) report on open employee plan audits and explain why any audits open for more than 36 months have not been closed; and (2) provide detailed disclosure and an explanation of the rationale for “adverse assistance” DOL is providing to plaintiffs lawyers targeting plan sponsors and fiduciaries.

• Republican-sponsored ESG legislation introduced: In May 2025, Rep. Rick Allen (R-GA), chair of the Subcommittee on Health, Employment, Labor, and Pensions, introduced legislation – the “Protecting Prudent Investment of Retirement Savings Act” – amending ERISA to incorporate (more or less) key provisions of the Trump 1.0 DOL ESG (environmental, social, and governance) investments and proxy voting regulations.

• USA Retirement Accounts: On May 1, 2025, Senator Cruz introduced the Universal Savings Account Act of 2025. These tax-favored “general savings accounts” (reminiscent of the (George W.) Bush Lifetime Savings Accounts (LSAs) proposal) would provide (1) a contribution limit of $10,000 (plus $500 times the number of calendar years after 2024, subject to a maximum of $25,000), (2) unrestricted withdrawals, and (3) Roth tax treatment.

• Age 18 401(k) participation: On May 12, 2025, Senators Cassidy (R-LA) and Kaine (D-VA) reintroduced the Helping Young Americans Save for Retirement Act. The bill would require 401(k) plan sponsors to allow employees as young as 18 to make contributions. Limitations: (1) the age-18 rule is not applicable to part-time employees, (2) the long-term part-time rule would not apply until age 21, (3) nondiscrimination and top-heavy rules would not apply, and (4) counting for applying the audit requirement under 5500 rules would be delayed.

• 403(b) Securities/Banking fix: On May 20, 2025, the House Financial Services Committee voted to favorably report out the “Retirement Fairness for Charities and Educational Institutions Act of 2025,” legislation that would address the remaining obstacles under federal securities laws to the use of collective investment trusts in 403(b) plans. Similar legislation has been introduced in the Senate.

• Auto Reenroll Act: On May 21, 2025, Senators Cassidy and Kaine reintroduced the “Auto Reenroll Act of 2025.” This bill generally clarifies that a plan provision “reenrolling,” after three years, non-participating/non-contributing employees (or participants contributing less than the plan-provided default) at plan default contribution rates will not result in noncompliance with certain ERISA and Tax Code provisions.

• Increase in the startup credit for “microemployers”:On May 23, 2025, Senators Hassan (D-NH) and Budd (R-NC) introduced the “Retirement Investment in Small Employers Act.” The bill would, for employers with 10 or fewer employees (“microemployers”), increase the current plan startup credit percentage from 50 percent to 100 percent and the dollar limitation from $500 to $2,500.

• Republican Senators introduce surplus transfer bill: On June 13, 2025, Senators Cassidy, M.D. (R-LA), Scott (R-SC), Marshall, M.D. (R-KS), and Tillis (R-NC) introduced the Strengthening Benefit Plans Act of 2025, legislation that would allow (1) the transfer of some surplus in a defined benefit plan 401(h) account to medical plan for active employees and (2) the transfer of some surplus in a defined benefit plan to a defined contribution plan (to fund, e.g., qualified nonelective contributions under a 401(k) plan) without terminating the DB plan.

Finally, we note that the Senate HELP Committee approved the nomination of Daniel Aronowitz to head up DOL’s Employee Benefits Security Administration (EBSA).

Litigation

Supreme Court decision in Cunningham:On April 17, 2025, the Supreme Court handed down its decision in Cunningham v. Cornell University, holding that, to survive a motion to dismiss, a plaintiff bringing an ERISA prohibited transaction claim against plan fiduciaries need not plead that there was no available exemption with respect to it. The “prohibited transaction” in this case is widely recognized as routine – the mere hiring of/paying a recordkeeper for the plan: Under ERISA a recordkeeper is a party in interest with respect to whom plan transactions (like, paying the recordkeeper) are (technically) “prohibited.” There is (of course) a statutory exemption for necessary services (like recordkeeping) under “reasonable arrangements,” “if no more than reasonable compensation is paid therefor.”

Justice Sotomayor, writing for a unanimous Court, held that:

• To survive a motion to dismiss, a plaintiff bringing a prohibited transaction claim against a plan fiduciary does not have to plead that no exemption is available.

• Justice Alito (in a concurring opinion) explained the significance of the motion to dismiss: “in modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery. Defendants facing those costs often calculate that it is efficient to settle a case even though they are convinced that they would win if the litigation continued.”

• The justices recognized that their decision could result in a significant increase in litigation. In this context, however, Justice Sotomayor stated that lower courts have tools to prevent “meritless litigation,” e.g., “a district court may insist that a plaintiff file a reply to an answer that raises one of the [ERISA section 408] exemptions as an affirmative defense.” This generally would take place before costly discovery.

Emerging litigation crisis:

The Court’s decision in Cunningham is part of an intensifying fiduciary litigation crisis in the 401(k)/403(b) plan community:

• After Cunningham every fiduciary of a plan that pays for recordkeeping can be sued, and the plaintiffs will survive a motion to dismiss

• It is likely that in these cases the fiduciary-defendants will have the burden of proving that the recordkeeper’s compensation is reasonable

• In that regard, third party payments to the recordkeeper may have to be considered (consider, e.g., Bugielski v. AT&T Services)

• And the ultimate decision about reasonableness may be made by a jury – courts in the Second Circuit have recognized a right to a jury trial for certain ERISA fiduciary claims, under a provision of ERISA that makes a plan fiduciary “personally liable to make good to such plan any losses to the plan resulting from [the fiduciary’s] breach [of its fiduciary duty].”

Risk transfer litigation: on the same facts two district courts reach opposite conclusions: On March 28, 2025, two Federal District Courts decided cases in Athene-related risk transfer cases, reaching opposite conclusions on what is likely to be the key issue in this litigation: whether participants in defined benefit plans have standing to sue on a claim of an ERISA fiduciary breach with respect to a pension risk transfer when they are (currently) receiving all benefits promised under the plan from the annuity carrier (in these cases, Athene Annuity and Life Co. and Athene Annuity & Life Assurance Company of New York) to whom those benefits have been transferred.

Forfeiture litigation: California district court dismisses plaintiff’s ERISA fiduciary/forfeiture claim with prejudice: On June 13, 2025, United States District Court for the Central District of California dismissed plaintiff’s claim in Daniel J. Wright v. JPMorgan Chase & Co et al., with prejudice. This was another in the line of ERISA fiduciary/forfeiture cases, in which plaintiff alleged that plan fiduciaries violated ERISA’s fiduciary rules by using plan forfeitures to reduce employer contributions rather than using them to reduce (otherwise participant-paid) plan expenses or allocating them to participant accounts. The court held that the plan’s language does not allow the use of forfeitures to reduce plan/participant expenses and that, even if the plan did permit using forfeitures to reduce participant expenses, plan fiduciaries are under no obligation to do so.

ESG and proxy voting developments

• DOL intends to revise ESG regulation: In September 2023, the United States District Court for the Northern District of Texas, in Utah v. Walsh, upheld DOL’s 2022 amendment of its 2020 ESG investing and proxy voting rules, rejecting claims by 26 states and other interested parties that the rule violated ERISA and the Administrative Procedure Act. The plaintiffs in that case subsequently appealed to the Fifth Circuit. On May 28, 2025, the Fifth Circuit filed a “status update” with respect to that appeal, stating that: “The Department [of Labor] has determined that it will engage in a new rulemaking on the subject of the challenged rule. This rulemaking will appear on the Department’s Spring Regulatory Agenda, and the Department intends to move through the rulemaking process as expeditiously as possible.”

• House hearings on proxy voting: On April 29, 2025, the House Financial Services Subcommittee on Capital Markets held a hearing on "Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets." In an opening statement, Chairman of the (full) Financial Services Committee French Hill (R-AR) stated: “Today, ISS and Glass Lewis shape the outcomes of shareholder votes across the market, especially as large index funds often vote in lockstep with their recommendations. In my view, that's not just advice. It's intimidating, de facto control. Even more troubling, companies are frequently reporting factual errors in proxy reports and are rarely given a chance to correct them before votes are cast. We need greater transparency, due process, and oversight to ensure that proxy voting remains accountable to the shareholders, not outsourced to this largely unregulated duopoly.” We expect this issue to be a priority both for Congressional Republicans and for the Administration.

• Antitrust lawsuit against large index fund managers: On May 22, 2025, the Department of Justice and the Federal Trade Commission filed a “Statement of Interest” in the lawsuit by 11 “Red States” against BlackRock, State Street, and Vanguard (alleged to be, via the index funds they manage, “the three largest shareholders of America’s publicly-held coal companies”). According to DOJ the lawsuit alleges (among other things) that “Defendants agreed to use their combined shares in competing coal companies to reduce production of coal in the United States, thereby driving down output and driving up prices.” The DOJ/FTC Statement of Interest is generally in favor of the States’ antitrust action proceeding.

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We will continue to follow these issues.