Appeals Court Reverses DC Plan Class Certification

The U.S. Court of Appeals for the Fourth Circuit has reversed a lower court order certifying a class in a lawsuit accusing Genworth Financial Inc. of breaching its fiduciary duties in managing its employees’ 401(k) plan, ruling that the claims involve individualized monetary losses that cannot be pursued as a mandatory class action.

In a March 10 opinion, the Fourth Circuit held that claims brought under the Employee Retirement Income Security Act seeking recovery for investment losses in defined contribution plans are inherently individualized. Because such claims depend on the circumstances of individual plan participants, the court said they cannot be certified under Federal Rule of Civil Procedure 23(b)(1), which creates mandatory class actions without opt-out rights.

The case, Trauernicht v. Genworth Financial Inc., was brought by former Genworth employees Peter Trauernicht and Zachary Wright on behalf of participants in the Genworth Financial Inc. Retirement and Savings Plan. The plaintiffs alleged the company breached its fiduciary duties under ERISA by selecting and retaining the BlackRock LifePath Index Funds as investment options in the plan.

According to the complaint, the BlackRock target-date funds underperformed comparable alternatives that the plan could have offered, including funds from Vanguard, Fidelity, T. Rowe Price and American Funds. The plaintiffs sought to recover alleged investment losses attributed to the plan’s continued use of the BlackRock funds.

The U.S. District Court for the Eastern District of Virginia had previously certified a class of plan participants and beneficiaries whose accounts were invested in the BlackRock LifePath Index Funds between August 1, 2016 and the date of judgment. The court concluded the claims were appropriate for certification under Rule 23(b)(1) because ERISA fiduciary-breach actions are brought on behalf of the plan.

Genworth sought interlocutory review, and the Fourth Circuit agreed to hear the appeal in 2024.

Writing for the panel, Judge Paul Niemeyer said the nature of defined contribution plans makes participants’ claims inherently individualized. The court explained that unlike defined benefit plans, where assets are pooled and benefits are fixed, defined contribution plans tie each participant’s retirement benefit to the performance of investments in that participant’s individual account.

“Because we conclude that the plaintiffs’ ERISA § 502(a)(2) claims brought in the context of a defined contribution plan are individualized monetary claims, we also conclude that they cannot be joined in a mandatory class certified under Rule 23(b)(1),” the court wrote.

The panel said allowing such claims to proceed as mandatory classes could create due process concerns because Rule 23(b)(1) does not require notice to class members or provide an opportunity for them to opt out of the litigation.

The court also found that the plaintiffs had not satisfied Rule 23’s requirement of commonality. Participants invested different amounts, entered and exited the BlackRock funds at different times and were exposed to varying market conditions, meaning not all participants experienced the same injury.

The court’s opinion states that “the plaintiffs’ and purported class members’ individual circumstances differed dramatically, and all did not suffer the same injury,” which undermines the argument that the case presents common questions suitable for class wide resolution.

As a result, the Fourth Circuit reversed and vacated the district court’s class certification order.

The dispute centers on the investment lineup in the Genworth Financial Inc. Retirement and Savings Plan, a defined contribution 401(k) plan with hundreds of millions of dollars in assets. Participants could allocate their retirement savings among various investment options, including the BlackRock LifePath Index target-date fund suite.

The plaintiffs allege that Genworth acted imprudently by choosing and retaining those funds despite allegedly stronger alternatives in the marketplace. They contend that the decision harmed plan participants by exposing them to weaker investment performance.

While the district court allowed the fiduciary-breach claims seeking monetary recovery to proceed, it dismissed the plaintiffs’ request for injunctive relief because they were former employees who had already withdrawn their assets from the plan.

The Fourth Circuit’s ruling does not resolve the underlying fiduciary-breach claims but significantly alters how the case may proceed by eliminating the certified class.

Genworth Financial Inc. is represented by Gibson, Dunn & Crutcher LLP and McGuireWoods LLP.

The plaintiffs are represented by Miller Shah LLP and Tycko & Zavareei LLP.

The Genworth Financial Inc. Retirement and Savings Plan had 4,365 participants with nearly $960 million in assets at the end of 2024, according to its most recent Form 5500 filing.