ERISA Lawsuits Spark Partisan House Committee Debate

During a Tuesday congressional hearing, U.S. representatives debated whether to strengthen pleading standards in Employee Retirement Income Security Act cases or to continue with the existing standard established in the Supreme Court’s Cunningham v. Cornell ruling, which allows plaintiffs to survive dismissal by alleging a “prohibited transaction.”

The House Committee on Education and the Workforce’s Subcommittee on Health, Employment, Labor, and Pensions held a hearing titled “Pension Predators: Stopping Class Action Abuse Against Workers’ Retirement,” following the introduction of the ERISA Litigation Reform Act by Representative Randy Fine, R-Florida, aimed at making it harder to bring legal complaints under ERISA.

The hearing centered on a divide between Democrats and Republicans on how complaints should be used to ensure employers are providing workers with the best possible retirement benefits. In recent years, the number of legal complaints has increased, particularly those related to fees, investments, performance and the use of retirement plan forfeitures.

“Today’s hearing is about protecting the retirement savings of American workers—and the employers who voluntarily maintain retirement savings and other employee benefit plans—from baseless predatory class action lawsuits,” said Subcommittee Chair Rick Allen, R-Georgia, during the hearing.

House Republicans and three witnesses—Andrew Salek-Raham from Groom Law Group, Lynn Dudley from the American Benefits Council, and Glenn Butash, chair of the ERIC Legal Center—argued that many lawsuits that have proliferated, both prior to and since the Supreme Court’s unanimous decision in Cunningham v. Cornell, are frivolous and meritless. Opponents of the suits claim the cases impose undue costs on plan sponsors, ultimately harming participants.

In contrast, Democrats and witness William Alvarado Rivera, senior vice president of litigation at the AARP Foundation, defended the Cunningham v. Cornell standard. They asserted that it effectively shields plaintiffs from fiduciary malpractice and that the resulting settlements and lawsuits encourage employers to improve practices for the benefit of plan participants.

“There is no question that strong enforcement of ERISA has led to better outcomes for plan participants and savers,” Rivera said during the hearing. “This is a feature, not a bug, to have private enforcement to ensure fiduciary duties are kept.”

Cornell Decision Looms Large

Following the Supreme Court’s April decision in Cunningham v. Cornell, retirement industry experts warned that it might cause a wave of ERISA litigation. Plaintiffs’ attorneys have utilized a lower standard to overcome motions to dismiss in pursuit of substantial payouts, according to statements by Salek-Raham, Dudley, Butash and the subcommittee’s Republicans during the hearing. The speakers highlighted that lawyers often receive one-third of the settlement, leaving participants with only a few dollars each.

“[One-]third of the settlement goes to the plaintiff’s attorney; it could be an equal amount that the company spent fighting it until they decided to settle,” Fine said during the hearing. “This is hurting our retirees.”

Proponents of toughening the pleading standard argue that many legal complaints are not only frivolous, but often consist of copied and pasted content across the country. Specifically, ERISA complaints—particularly about fees and plan forfeitures—have proliferated in district courts, frequently presenting similar claims.

“In the 43 years I have worked with plan sponsors, I have never seen litigation like it is today,” said Dudley during the hearing.

For instance, plaintiffs commonly allege that employers breach fiduciary duties by using forfeited plan assets solely to offset future employer contributions, rather than to cut administrative costs, although many plan documents permit employers to allocate forfeitures for either purpose. Critics contend that restricting use of the funds to offset contributions negatively impacts participants.

Recently, the Department of Labor, aligning with President Donald Trump’s deregulatory stance, has supported employers in forfeiture cases. Consequently, district courts have increasingly favored employers, although prior rulings already tended to favor plan sponsors.

To be sure, while many of the cases appear alike, AARP’s Rivera said that it is normal for cases to look similar if they are making similar allegations.

Stifling Innovation

During the hearing, proponents of limiting ERISA complaints also argued that the regulatory burdens have restricted plan sponsors from innovating, at the expense of participants.

The American Benefits Council’s Dudley, citing an informal survey, told the hearing that 89% of plan sponsors said that litigation risk is a significant factor, while 29% said that they would not offer anything new in their plans unless others also did so. She also reported that 25% said they will not offer additional participant assistance out of litigation concern, and 43% said they would would not provide lifetime income options.

“Fiduciaries who are seeking to innovate are threatened by meritless, frivolous lawsuits in the same way that fiduciaries who are engaging in the more mundane aspects of planning administration are threatened,” said Groom’s Salek-Raham. “They’re all threatened, and the litigation is a powerful disincentive to fiduciaries to make innovative choices.”

One of the suggested innovations plan sponsors may avoid is the inclusion of alternative investments in defined contribution plans. Trump’s August 7 executive order urged the DOL and the Securities and Exchange Commission to provide guidance aimed at encouraging plan sponsors to adopt these alternative investments.

In remarks at the New York Stock Exchange on Tuesday, SEC Chairman Paul Atkins said, “We must also reform the litigation landscape for securities lawsuits to eliminate frivolous complaints” in a speech centered on “revitalizing America’s markets.”

Though the SEC chair has repeatedly offered a favorable view of deregulation and of adding alternative investments into DC plans, adoption remains low.

Meanwhile, Fine’s bill aims to limit the standard set in the Cunningham ruling and restrict ERISA litigation. However, as the ruling was only issued in April, Representative Joe Courtney, D-Connecticut said during the hearing that there has been insufficient time for it to have caused significant issues.

“We are rushing ahead with legislation on an issue that is far from a crisis,” he said.