The retirement plan landscape is shifting beneath our feet as a tidal wave of litigation threatens to fundamentally alter how 401(k) plans are administered. With settlements now routinely exceeding $400 million annually and a recent Supreme Court ruling making it easier than ever to bring claims forward, plan sponsors face unprecedented legal scrutiny of practices long considered to be industry standards.
According to a recent Employee Benefit News article, a new report from law firm Duane Morris has highlighted how workplace retirement plans are facing a significant surge in class action lawsuits under the Employee Retirement Income Security Act (ERISA). This trend should prompt plan sponsors to carefully evaluate their 401(k) administration policies.
The last three years have seen an unprecedented explosion in ERISA settlements compared to the previous three decades. For the third consecutive year, the top 10 ERISA class action settlements have exceeded $400 million annually. This dramatic increase stems from two key factors: highly skilled plaintiffs’ attorneys entering the space (attracted by substantial financial opportunities) and the emergence of novel legal theories challenging traditional retirement plan practices, according to Gerald Maatman Jr., co-author of the report and chair of Duane Morris’ class action defense practice team, who was quoted in the Employee Benefit News article.
One particularly noteworthy development involves how employers handle forfeited 401(k) funds. When employees leave before fully vesting in employer matching contributions, the unvested portion is forfeited. Many employers currently use these funds to offset future plan contributions, a widely used practice.
However, recent class action suits argue that these forfeited funds should instead cover administrative costs typically paid by plan participants. Several federal district courts have already found that these lawsuits present plausible claims under ERISA—a concerning development for plan sponsors using standard forfeiture allocation methods.
Industry experts offer mixed perspectives on the potential impact:
- Some experts quoted in Employee Benefit News suggest the impact on individual participants would be minimal, with most employees unlikely to notice any difference in their accounts
- Others note that at companies with high turnover rates, forfeitures can represent significant sums
While these cases have survived initial motions to dismiss, they still require class action certification to proceed. When a case achieves class action status, companies typically opt for large settlements rather than risk even costlier court judgments. As such, these high-profile settlements may encourage other plan sponsors to preemptively change their practices to avoid becoming the next litigation target.
Adding to these concerns, a recent unanimous Supreme Court ruling has “substantially lowered the bar for plaintiffs alleging prohibited transactions” in ERISA cases. The 9-0 decision involving Cornell University significantly shifts the burden of proof in these cases. Defendants can no longer secure dismissals by pointing to a plaintiff’s failure to address statutory exceptions. They must now provide clear evidence that an exception applies.
Legal experts predict this ruling “will likely lead to an uptick, if not an explosion, in filings.”
While these cases may not dramatically alter administrative decisions in the immediate term, they highlight the importance of proactive fiduciary risk management:
- Review plan documents regarding forfeiture allocation policies
- Consider eliminating discretionary language in plan documents in favor of specific instructions
- Ensure all service provider arrangements can withstand increased scrutiny regarding fees
- Document fiduciary decision-making processes thoroughly
- Stay informed about evolving ERISA litigation trends
For retirement plan sponsors and their advisors, these developments represent a critical reminder that fiduciary responsibilities require ongoing vigilance and adaptation to an increasingly complex legal environment.
