4th Circuit reverses ERISA class cert order

Claims brought under § 502(a)(2) of the Employee Retirement Income Security Act (ERISA) in the context of a defined contribution plan are individualized monetary claims that cannot be joined in a mandatory class under Federal Rule of Civil Procedure 23(b)(1), the 4th U.S.
Circuit Court of Appeals has ruled, reversing a class certification order.

Peter Trauernicht and Zachary Wright, two former employees of Genworth Financial, brought a putative class action alleging that the company, as the sponsor of their defined contribution retirement plan, breached its fiduciary duties in selecting and retaining certain investment opportunities for the plan because the funds were imprudent investments.

On a motion from the plaintiffs, the district court certified a class under Rule 23(b)(1) that consisted of all participants in and beneficiaries of the plan.

Genworth appealed, and a panel of the federal appellate court reversed.

“[W]hen ERISA § 502(a)(2) claims are brought in the context of a defined contribution plan, they are indeed ‘individualized monetary claims’ and therefore cannot be joined … in a mandatory class certified under Rule 23(b)(1),” Judge Paul V. Niemeyer wrote.

The 26-page opinion in Trauernicht v. Genworth Financial Inc. (VLW 026-2-083) was joined by Judges G. Steven Agee and Julius N. Richardson.

Eugene Scalia of Gibson, Dunn & Crutcher in Washington, D.C., who represented Genworth, did not respond to a request for comment on the decision. Neither did Connecticut-based attorney James E. Miller of Miller Shah, who represented the plaintiffs.

Challenge to plan fund selection

While employed at Genworth, Trauernicht and Wright each participated in the company’s BlackRock LifePath Index Funds. Trauernicht invested in three different vintages of the funds while Wright elected to invest solely in one fund.

A defined contribution plan — as opposed to a defined benefit plan — the Genworth plan included individual retirement accounts for over 4,000 participants with an aggregate value of more than $900 million.

Trauernicht and Wright alleged that their investments in the funds performed “significantly worse” than other, similar investments that the plan could have offered. In particular, the complaint identified four alternative funds as comparators.

The plaintiffs claimed that Genworth breached the fiduciary duties it owed to the plan by failing to appropriately monitor the performance of its funds, resulting in the imprudent retention of those funds in the plan, in violation of ERISA.

For relief, the plaintiffs requested declaratory and injunctive relief, as well as the return of all losses to the plan, restitution and/or damages.

After denying Genworth’s motion to dismiss, the district court granted the plaintiffs’ motion to certify a class pursuant to Rule 23(b)(1) consisting of all plan participants and beneficiaries from July 29, 2016, to Aug. 15, 2024.

Genworth appealed.

‘Individualized monetary claim’

Given the context of a defined contribution plan, the plaintiffs’ claims for monetary relief under ERISA § 502(a)(2) and § 409(a) for a breach of fiduciary duties allegedly causing losses to a large number of individual retirement accounts in the plan did not satisfy the requirements for certification of a mandatory class action under Rule 23(b)(1), the court found.

The scope of relief varies considerably depending on whether the plan is a defined contribution plan or a defined benefit plan, the court explained. In a defined contribution plan, where the plan assets are allocated to individual accounts, and a participant’s benefits are based solely upon the amount held in the individual account, a plan participant can bring an ERISA
§ 502(a)(2) claim to seek monetary relief on behalf of the plan for the losses sustained with respect to the plan assets in his or her individual accounts.

“And such recovery would be paid not to the plan generally, nor to the participant directly, but rather to the participant’s individual retirement account based on the losses that particular account sustained as a result of the fiduciary breach,” the court wrote. “[B]ased on the nature of the ‘appropriate relief’ available under ERISA
§ 502(a)(2) in the context of a defined contribution plan, the choice would belong to each individual participant, consistent with ‘our deep-rooted historic tradition that everyone should have his own day in court,’ or, at the very least, the ability to opt out of pursuing what is in essence an individualized monetary claim.”

Section 502(a)(2) does not provide a remedy for individual injuries — it only provides for plan injuries.

“Therefore, a single participant can bring an action on behalf of the plan to recover ‘for fiduciary breaches that impair the value of the plan assets in [his] individual account,’” the court said. “What this recognizes is that in a defined contribution plan, several plaintiffs may end up bringing their own actions for the impairment of the value of the plan assets in their individual accounts, and any recovery would be payable to those individual accounts, not to the participants directly. We thus conclude that in the context of a defined contribution plan, a participant’s damages claim under § 502(a)(2) is an ‘individualized monetary claim.’ And when so considered, it is clear that a mandatory class action under
Rules 23(b)(1) is inappropriate.”

Commonality analysis missing

In addition to erring by joining § 502(a)(2) claims in a class action under Rule 23(b)(1), the district court compounded its error by concluding that the plaintiffs’ claims were inherently common, the court determined.

This generalized conclusion failed to recognize that the plaintiffs’ claims were individualized monetary claims, requiring the district court to conduct a rigorous analysis to determine whether members of the class suffered the same injury, as required for finding commonality under Rule 23(a)(2).

Trauernicht and Wright alleged injury by comparing the performance of the
BlackRock LifePath Index Funds to four comparator funds, two that invest in actively managed funds and two that invest in passively managed funds.

Genworth countered that the BlackRock funds were passive, so they had to be compared only to the passive comparators. When such a comparison was made, the record showed that many members of the class did not suffer an injury, as the comparator funds underperformed the BlackRock
funds during the class period for three separate vintages, accounting for as much as 42% of the plan assets.

Instead of addressing the dispute, the district court postponed the commonality analysis, another error, the court found.

Further, the “record shows that each plaintiff, as well as each class member, participated in the plan in a materially different way,” the court said. “Each participant made his or her own investment decisions with respect to his or her individual account, and the participant could change that decision on any given day.”

As the district court failed to address commonality with any particularity, it erred by finding the commonality prerequisite necessary for class certification was satisfied, the court found, reversing and vacating the class certification order.