ERISA Litigation Update

Key Takeaway: Plaintiffs have continued to bring lawsuits regarding ERISA-governed retirement plans — albeit at a higher rate than 2023 — due, in large part, to a rise in the number of cases challenging the allocation of forfeited plan contributions. Settlements are consistent in number but are down in average amount compared with 2023. Plaintiffs continue to target smaller plans, but a majority of suits filed still involve large plans with more than $1 billion in assets. Plaintiffs allege new breach of fiduciary duty theories against defined benefit pension and health plans.

• ERISA Class Action Lawsuits Continue to be Filed at a Higher Rate Than Pre-Pandemic.
  
  Following 2020’s blockbuster year, case filings have followed a see-sawing pattern of troughs and peaks (see chart below). 2024 saw that trend continue, with 62 new cases filed, compared with 46 cases in 2023. The rise in new filings in 2024 was due, in large part, to new legal theories advanced by the plaintiffs’ bar concerning the handling of forfeited employer contributions to 401(k) and 403(b) plans, as discussed in further detail below.
  
  
  
  
  In addition to the 62 cases in the chart above regarding defined contribution plans, there were 13 suits filed in 2024 that challenged pension risk transfers by sponsors of defined benefit plans. Those “pension risk transfer” cases — discussed in more detail in the “New Breach of Fiduciary Duty Challenges to Defined Benefit Pension Plans” section below — challenge the transfer of pension payment obligations from plan sponsors to annuity providers, which plaintiffs allege was carried out to effect cost savings for plan sponsors and in a manner that put plan participants’ benefits at risk.
• Continued Focus on Smaller Plans: In 2023, we noted that the plaintiffs’ bar continued to bring suits concerning smaller plans, with more than a third of new cases filed that year challenging features of defined contribution plans with less than $1 billion in assets. In 2024, that trend continued, with an uptick in complaints concerning smaller plans. Of the cases filed in 2024, more than half involved plans with less than $2 billion in assets, and more than 40% involved plans with less than $1 billion in assets.
  
  Overall, however, a significant number of filings in 2024 were against larger plans, including more than 40%, more than 25%, and nearly 14% of targeted plans having more than $2 billion, $5 billion, and $10 billion in assets, respectively.   The following is a breakdown of 2024 complaints by plan size. (Note that the chart reflects only plan size information for those plans sued in 2024 to the extent publicly available.)
  
  
  
  
  
• Settlements Continue but are Down from 2023. In 2024, there were 38 settlements in ERISA class actions challenging plan fees and investments — roughly the same number as 2023 (36), but the dollar value of settlements in 2024 trended downward.
• Settlements in 2024 totaled approximately $174 million, down from $219 million in 2023. Compared with 2023, the average settlement amount decreased by more than a million dollars, from $5.9 million in 2023 to just under $4.6 million in 2024. Compared to 2023, there were six fewer settlements in amounts greater than $5 million and five more settlements of less than $1 million in 2024. A breakdown of the settlements by settlement amount is as follows:
  
  
  
  
  Lawsuits Continue to Challenge Allocation of Forfeitures: 2023 saw an emerging theory among plaintiffs: that plan sponsors and fiduciaries violated ERISA by allocating forfeited employer 401(k) plan contributions to reduce future employer contributions to the 401(k) plan rather than to paying plan expenses otherwise borne by participants. 2024 saw a significant spike in such lawsuits, which accounted for nearly half of all new cases. Of those, seven cases alleged forfeitures alongside other more typical allegations concerning excessive fees paid by plan participants, while the remainder solely alleged misuse of plan forfeitures.
  
  2024 also saw several motions to dismiss decisions in forfeiture cases. Of the motions to dismiss decisions to date, five were granted, one was granted in part, and one was denied. (In addition to the foregoing, one court granted the defendants’ motion to compel arbitration.) Of the five motions granted, plaintiffs filed amended complaints in three cases and, in a fourth case, are still within the time period allotted to file an amended complaint. In one case, the plaintiffs elected not to file an amended complaint, and the case remains dismissed.
• Some Lawsuits Focus on Managed Accounts: In 2024, suits were filed against five plan sponsors and one service provider challenging managed account fees. The cases are Naylor v. BAE Sys., Inc. (No. 24-949 (E.D. Va.)), Hanigan v. Bechtel Glob. Corp. (No. 24-875 (E.D. Va.)), Kelley v. Teachers Ins. and Annuity Assoc. of Am. (No. 24-5945 (S.D.N.Y.)), McWashington v. Nordstrom, Inc. (No. 24-1230 (W.D. Wa.)), Nykiel v. Smith & Nephew, Inc. (No. 24-12247 (D. Mass.)), and Vaccaro v. Pearson Educ., Inc. (No. 24-9744 (S.D.N.Y.)). In those cases, the plaintiffs challenged the reasonableness of fees charged by investment advisors providing investment advice tailored to individual plan participants.
• New Excessive Fee Challenges in Defined Benefit Health Plans: 2024 saw new challenges to two categories of fees charged in health plans: tobacco surcharges imposed on plan participants and fees charged in connection with pharmaceutical benefits.
  
  • Tobacco Surcharge Cases: Nearly 20 cases were filed against health plan sponsors in 2024, challenging the fees charged to plan participants for tobacco use. Health plans are required to provide for a “reasonable alternative standard,” such as a smoking cessation program, which, if complied with, will enable plan participants to avoid the surcharge. The plaintiffs in these actions challenge the adequacy of the plan’s reasonable alternative standard for tobacco users — alleging, for example, that plan participants are not permitted to enroll in smoking cessation programs after the plan’s open enrollment period expired or, if the participant was permitted to enroll in the smoking cessation program after open enrollment, that the plan does not refund the surcharges assessed before the participant enrolled in the smoking cessation program. The plaintiffs claim that plan participants who use tobacco are not afforded a sufficient opportunity to avoid the surcharge. While a handful of similar cases were filed in the past, 2024 saw a significant uptick, with 14 suits filed between August and November. Some of the cases have settled, but most remain pending at early stages of litigation.
  • Pharmaceutical Fees: Over the past few years, several cases were filed challenging fees paid to pharmaceutical benefit managers for participants’ prescription medications. At the end of December 2024, two new suits were filed based on a new theory challenging the costs that patients pay for medications. Specifically, the complaints allege that the challenged plans use a third-party copay assistance program that, while helping to reduce participants’ copays, does not reduce the deductibles or other shared responsibility payments owed by the plaintiffs under the plan. Although the new allegations are worth noting, it remains to be seen whether similar cases will continue to be filed in 2025. The two cases are Gluesing v. PrudentRx LLC, No. 24-549 (D.R.I.) and Gurwitch v. Save on SP LLC, No. 24-1583 (N.D.N.Y.).
• New Breach of Fiduciary Duty Challenges in Defined Benefit Pension Plans: 2024 saw a new trend of cases concerning defined benefit pension plans. A dozen “pension risk transfer” suits were filed against the fiduciaries of nine plans challenging the transfer of plan sponsors’ pension payment obligations to annuity providers. Several of the suits also name the independent fiduciaries retained by the plan sponsor for purposes of selecting an annuity. The plaintiffs generally allege that the defendants were motivated by cost savings when engaging in the transactions and that they chose an unduly risky annuity provider, posing risk of loss of benefits to participants. Is it noteworthy that all but one of these cases — Dempsey v. Verizon Commc’ns., Inc. (No. 24-10004 (E.D. Va.)) — challenge the transfer of pension obligations to the same annuity provider. All of the pension risk transfer cases are currently at an early stage, with motions to dismiss pending or responsive pleadings not yet filed.

Key Takeaway: The Supreme Court will hear argument on January 22, 2025, on the pleading standards for prohibited transaction claims under 29 U.S.C. § 1106(a).

In Cunningham v. Cornell University, the Supreme Court is poised to address the pleading standards for alleging that a transaction between an employer-sponsored benefit plan and a “party in interest” is a prohibited transaction under 29 U.S.C. § 1106(a). The prohibited-transaction provision is broad, extending to a series of transactions that employer-sponsored benefit plans engage in every day (including, critically, all plan transactions with service providers). But § 1106 expressly provides that the specified transactions are prohibited “[e]xcept as provided in section 1108,” which contains exemptions that allow plans to enter into precisely the types of transactions specified in § 1106, particularly when doing so is beneficial for benefit plans and their participants.

At issue before the Supreme Court is a circuit split regarding what a plaintiff must plead when alleging a prohibited transaction under § 1106. While the circuits have taken different approaches, the general disagreement involves whether the plaintiff must plead around the § 1108 exemption to survive a motion to dismiss or whether it is sufficient merely to allege the occurrence of a transaction covered by § 1106. In the decision below in Cunningham, the Second Circuit concluded that the exemptions in § 1108 are “incorporated directly into § 1106(a)’s definition of prohibited transactions,” meaning the plaintiff had the burden at the pleading stage to allege that a transaction fell outside § 1108. As a result, for the service-provider transactions at issue in Cunningham, it was insufficient for the plaintiff merely to allege that a fiduciary caused the plan to compensate a service provider for its services. The complaint instead had to allege that the services were unnecessary or involved unreasonable compensation and that the transaction therefore fell outside 29 U.S.C. § 1108(b)(2)(A). In their brief before the Supreme Court, the plaintiffs take issue with the Second Circuit’s textual interpretation and further raise a series of purported administrability concerns with the Second Circuit’s approach. The defendants provide a competing textual interpretation in their response brief and further counter the plaintiffs’ imagined consequences as illusory and exaggerated. The Supreme Court will hear argument on the case on January 22, 2025, and will likely issue a decision this spring.

The case is docketed in the Supreme Court as Cunningham v. Cornell University, No. 23-1007.

Key Takeaway: The Second Circuit affirmed a district court’s dismissal of an ERISA complaint, holding that the plaintiffs did not cite meaningful benchmarks to support their claim that the at-issue plan paid excessive recordkeeping fees.

On December 10, 2024, the Second Circuit Court of Appeals affirmed the dismissal of a lawsuit against Deloitte LLP. The complaint alleged that the fiduciaries of Deloitte’s 401(k) plan violated ERISA’s duty of prudence by failing to adequately manage the plan’s recordkeeping and administrative fees, which resulted in the payment of excessive fees by plan participants. The U.S. District Court for the Southern District of New York granted Deloitte’s motion to dismiss in July 2023. The plaintiffs appealed.

On appeal, the Second Circuit affirmed dismissal of the plaintiffs’ claims. To support their allegations that the plan’s recordkeeping fees were excessive, the plaintiffs cited Forms 5500 for six allegedly similar plans, dividing the total direct costs in those forms by the number of participants in the other plans to attempt to show that the Deloitte plan’s per-participant fees were substantially higher than the fees the purported comparator plans charged. The Second Circuit found this was not an adequate comparison for three reasons. First, the court found that the complaint failed to plausibly allege that challenged fees were excessive relative to the services rendered. Second, the Court found that the complaint’s comparison of direct costs (and omission of indirect costs) failed to compare the Deloitte plan’s total recordkeeping expenses to those of the allegedly comparable plans. Third, the court observed that the plaintiffs’ comparison of the Deloitte plan’s recordkeeping costs in each of five years to the comparator plans’ recordkeeping costs from just 2019 limited the court’s ability to draw inferences about the fee differential over the course of the putative class period. For these reasons, the Second Circuit held that the complaint failed to provide a meaningful benchmark by which to assess the Plan’s recordkeeping fees.

The case is Singh v. Deloitte LLP, No. 23-1108, in the Second Circuit Court of Appeals and is available here.

Key takeaway: A divided panel of the Sixth Circuit created an intra- and inter-circuit split with regard to the pleading standard for breach of fiduciary duty claims.

On November 20, 2024, a divided panel of the Sixth Circuit Court of Appeals reversed the dismissal of claims that Parker-Hannifin Corporation breached its fiduciary duties by imprudently retaining the Northern Trust Focus Funds and imprudently providing participants with higher-cost shares of plan investment options (along with a subsidiary failure-to-monitor claim). The U.S. District Court for the Northern District of Ohio granted Parker-Hannifin’s motion to dismiss in December 2023. The plaintiff appealed.

On appeal, the Sixth Circuit reversed the dismissal of the plaintiff’s claims in a 2-1 decision. Addressing the district court’s conclusion that the plaintiff had failed to identify other plans that could serve as meaningful benchmarks for his underperformance claim, the majority first concluded that a meaningful benchmark is not required to sufficiently plead a claim of imprudence. Either way, the majority further explained that the plaintiff had identified a meaningful benchmark for the at-issue funds in the form of the S&P target date fund benchmark.  As for the share-class claim, the majority deemed it sufficient that the plaintiff had alleged that Parker-Hannifin would have been able to negotiate for a lower fee, even assuming one was not available based on minimum investment thresholds. The dissent disagreed across the board.

The case is Johnson v. Parker-Hannifin Corp., No 24-3014, in the Sixth Circuit Court of Appeals and is available here. Parker-Hannifin filed a petition for rehearing en banc on December 18, 2024. The Sixth Circuit called for a response to the petition on December 30, 2024.

Key Takeaway: A district court joined several other courts in dismissing claims challenging the allocation of forfeitures in a 401(k) plan.

On November 1, 2024, the U.S. District Court for the Northern District of California dismissed an ERISA lawsuit against Clorox and the committee responsible for overseeing the administration of Clorox’s 401(k) plan. The complaint — one of many similar lawsuits filed in 2023 and 2024 against different plan sponsors and fiduciaries — alleged that the defendants had violated ERISA by allocating plan forfeitures to reduce Clorox’s company contributions to the plan rather than to pay plan expenses borne by its participants. The plaintiff alleged that this conduct violated ERISA’s duties of prudence and loyalty, anti-inurement rule, and prohibited transaction provisions. The defendants moved to dismiss the complaint for failure to state a claim.

The district court granted the motion to dismiss in its entirety. The court first found that the plaintiff had failed to plead a plausible breach of fiduciary duties because his theory — that ERISA’s fiduciary duties always require forfeitures to be used to pay plan expenses — was “impermissibly broad” and inconsistent with a proposed IRS regulation and the context-specific nature of ERISA’s duties, among other aspects of ERISA. Moreover, the court dismissed the plaintiff’s anti-inurement and prohibited transaction claims on the grounds that the forfeitures did not leave the plan’s trust fund and were still used to pay benefits.

The case is McManus v. The Clorox Company, No 24-5325, pending in the Northern District of California, and is available here. The court granted the plaintiff leave to amend the complaint within thirty days of the date of the decision, and the plaintiff has since done so. On December 19, 2024, the U.S. District Court for the District of New Jersey entered a similar order granting a motion to dismiss claims regarding the allocation of forfeitures brought against Honeywell. That decision is available here.

Client Alert: “Supreme Court Grants Review in ERISA Class Action Challenging Plan Sponsor’s Recordkeeping Arrangement,” (October 17, 2024)

Isabel Marin, Jaime A. Santos, and James O. Fleckner co-authored a Client Alert that discusses how the Supreme Court granted certiorari in Cunningham v. Cornell to address the pleading standards for prohibited-transaction claims under 29 U.S.C. § 1106(a).

Speaking Engagement: Goodwin CLE Week 2025 (January 13-17, 2025)

Christina Hennecken, Goodwin partner, spoke on the session “Navigating the Evolving Landscape of ESG Litigation.”

Goodwin’s ERISA Litigation practice was recognized by The Best Lawyers Best Law Firms 2025 for Litigation – ERISA in Boston; Washington, DC; and nationwide, as well as Employee Benefits (ERISA) Law in Boston and Washington, DC.