Strategic Approaches to Overcoming ERISA Litigation Challenges
The Employee Retirement Income Security Act of 1974 (ERISA) establishes stringent standards for fiduciaries overseeing employee benefit plans, ensuring that participants' interests are diligently protected.
In 2024, ERISA litigation surged to 136 new cases filed, a 36% increase from the 100 cases filed in 2023. This included a major case against UnitedHealth Group, who agreed to pay a $69 million settlement for underpaying plan benefits, making it one of the year’s most significant ERISA settlements.
With ERISA litigation on the rise, plaintiffs’ attorneys need to understand the key challenges to litigating these cases and how to overcome them. This article explores several challenges that arise in ERISA fiduciary breach cases, including litigating imprudent investment claims, addressing prohibited transactions, and navigating arbitration clauses and covenants not to sue.
Challenges of litigating imprudent investment claims
Imprudent investment option claims under ERISA arise when plaintiffs allege that a plan’s fiduciaries failed to act prudently in selecting or maintaining certain investment options available to plan participants, resulting in poor investment performance.
However, bringing a successful claim requires more than simply pointing to underperformance or high fees relative to other options available on the market. Some of the key challenges when litigating these cases include:
- Courts require specific allegations: Courts have consistently held that plaintiffs must plead specific, well-supported allegations demonstrating that a prudent fiduciary in similar circumstances would have offered different investment options to plan participants. Importantly, failing to adequately allege that the plan’s options underperformed meaningful and truly comparable benchmarks or relying solely on comparative underperformance can lead to early dismissal.
- Apples-to-apples comparisons: When alleging that a plan’s investment options underperformed or were too expensive relative to other investment options, plaintiffs should ensure that those other options are meaningfully comparable to the challenged options. For example, allegations that a fiduciary acted imprudently by offering an actively managed fund because it was more expensive than a passively managed fund is insufficient. A proper comparator in such circumstances is a similar actively managed fund.
For similar reasons, allegations that a fund with a certain risk profile underperformed relative to another fund with a different risk profile cannot support an imprudent investment option claim. When selecting comparator funds in this context, it is crucial to identify funds that are similar to the challenged funds in all materials respects.
- Relying solely on allegations of underperformance: Courts nationwide have rejected claims that rest only on allegations of comparative underperformance without additional allegations that support the inference that the fiduciary’s decision-making process was flawed. Decisions in this context also emphasize the necessity of adequately alleging that an investment was imprudent when initially selected, became imprudent over time, or was otherwise unsuitable for the plan’s objectives.
Challenges in addressing prohibited transactions
Another critical aspect of ERISA fiduciary breach litigation involves prohibited transactions claims under ERISA Section 406. This provision broadly bars fiduciaries from engaging in certain transactions involving plan assets due to inherent risks of conflicts of interest.
A frequent example is when a fiduciary hires a third-party service provider for recordkeeping or administrative services and compensates that provider with plan assets.
Assessing potential defenses under ERISA Section 408
Plaintiffs’ attorneys must carefully assess and prepare for potential defenses under ERISA Section 408, which provides exemptions for certain prohibited transactions. The most frequently invoked Section 408 defense in recordkeeping and administrative fee cases is that the services were necessary, and the fees paid were reasonable. Failing to anticipate and address these defenses at the pleading stage could leave a claim vulnerable to dismissal.
Complicating matters further, there is currently a circuit split regarding what plaintiffs must plead to state a cognizable prohibited transaction claim. For example, the Eighth and Ninth Circuits allow plaintiffs to move past the motion to dismiss stage simply by alleging that a fiduciary engaged a third-party provider and paid for services with plan assets, shifting the burden to the defendant to plead and prove that a Section 408 exemption applies as an affirmative defense.
In contrast, the Second Circuit requires plaintiffs to plead not just the existence of a prohibited transaction, but also facts suggesting the services were unnecessary or overpriced. In other words, plaintiffs need to plead facts negating a Section 408 defense in order to state a prohibited transaction claim in the first instance.
The Supreme Court will resolve this circuit split soon in Cunningham v. Cornell University (U.S. Sup. Ct. No. 23-1014), a case that the Court heard this term and will decide by summer 2025.
To avoid pitfalls and ensure that claims survive a motion to dismiss regardless of how the Supreme Court rules, plaintiffs should take a cautious approach: when alleging that recordkeeping or administrative services were prohibited transactions, they should proactively plead that the fees at issue were either excessive or for services that were not necessary.
Understanding the governing law in the relevant circuit is essential, but preparing for a potential shift toward a heightened pleading standard will help safeguard claims.
Challenges with arbitration clauses and covenants not to sue
Attorneys need to navigate contractual provisions that can significantly impact a plaintiff's ability to pursue ERISA imprudence claims. Arbitration clauses, waivers, and promises not to sue can create significant barriers, potentially foreclosing claims before they even begin.
Some arbitration clauses simply dictate the forum for dispute resolution without limiting participants’ substantive rights, while others improperly restrict participants’ abilities to obtain remedies available under ERISA and are therefore unenforceable.
For example, in Bird v. Shearson Lehman/American Express, Inc., 926 F.2d 116 (2d Cir. 1991), the Second Circuit enforced an arbitration provision because it only required arbitration of ERISA claims without curtailing the plaintiff’s ability to seek full ERISA relief in the arbitral forum. Since the clause preserved all statutory rights and remedies, it was deemed enforceable.
In Cedeno v. Sasson et al., No. 21-2891 (2d Cir. May 1, 2024), the Second Circuit held that an arbitration clause in an ESOP plan was unenforceable. The court concluded that the clause improperly barred participants from seeking plan-wide relief in arbitration, a core statutory remedy under ERISA, effectively stripping them of a statutory right.
Cedeno demonstrates that arbitration provisions, whether in a severance agreement or embedded in plan documents, may be unenforceable if they go too far in restricting a plaintiff’s ability to vindicate statutory rights.
Separately, severance agreements often contain waivers or other restrictive provisions that can foreclose ERISA claims. In Esquivel v Whataburger Restaurants LLC, 74 F.4th 1240 (5th Cir. 2023), the court concluded that a general release of ERISA claims in a severance agreement was unenforceable but nonetheless upheld a different clause in the agreement—a promise not to sue—which ultimately barred the plaintiff’s claim.
This decision highlights a crucial distinction: Even if a broad waiver of ERISA claims is unenforceable, other promises in severance agreements, such as covenants not to sue, may still foreclose a plaintiff’s ERISA claims. Attorneys must carefully review plan documents and severance agreements to determine whether any provisions could preemptively defeat an ERISA claim.
How technology helps solve ERISA litigation challenges
ERISA litigation presents procedural and evidentiary hurdles that can make even strong claims difficult to pursue. Advancements in legal technology are helping plaintiff attorneys navigate these challenges more efficiently, from identifying viable claims to overcoming dispositive motions.
Partnering with Darrow provides attorneys with access to pre-vetted ERISA cases and data-driven insights that help streamline case selection and preparation. Our Legal Intelligence Platform analyzes publicly available data to identify potential violations, allowing firms to focus their efforts on cases with strong merits.
In addition, our in-house legal consultants and ERISA experts provide strategic support throughout the entire litigation process, helping firms strengthen claims, anticipate defenses, and increase the likelihood of favorable resolutions.
Careful plaintiff selection is another critical factor in ERISA litigation. Otherwise meritorious claims can be at risk if plaintiffs are bound by arbitration clauses or severance agreements that limit their ability to sue.
To find only qualified plaintiffs, Darrow’s plaintiff-finding team runs targeted campaigns and vets them to ensure they meet class requirements. Attorneys can then access PlaintiffLink, Darrow’s plaintiff-management platform, to identify qualified, vetted plaintiffs, track case progress, and communicate directly with Darrow’s legal consultants, moving cases forward with confidence.
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