The case for strong governance in an era of heightened ERISA litigation

ERISA class action litigation against employer sponsored retirement plans continues to surge, with a growing number of cases filed against 401(k), 403(b) and defined benefit plans. According to Bloomberg Law, almost 70 proposed ERISA class action lawsuits were filed in the first quarter of 2026, which is significantly higher than the 38 that were filed in the first quarter of 2025. In addition to increased class action fiduciary litigation risk, the failure to follow ERISA’s fiduciary duties could result in serious and significant civil and criminal penalties and even personal liability.

In light of this recent wave of class action litigation, it is critical that employers understand the importance of having a robust governance process in place for their retirement plans. A recent WTW governance survey found that four out of five employers plan to reevaluate their plan governance structure and/or policies within the next two years, over 50% of employers plan to conduct fiduciary training, and over 30% plan to reevaluate their existing fiduciary insurance policies.

Background

ERISA was designed to protect employee benefit plans, including retirement plans, and plan participants and beneficiaries. The individuals responsible for operating health and welfare plans are bound by ERISA’s fiduciary duties and failure to fulfill those duties can expose both the plan and individuals to significant legal and financial risk.

Concerns regarding fiduciary litigation understandably increased last year following the Supreme Court case Cunningham vs. Cornell University (see the WTW Insider article, U.S. Supreme Court decision may increase ERISA litigation exposure and costs). In that case, the Supreme Court held that plaintiffs may survive a motion to dismiss simply by alleging that a transaction is prohibited, regardless of whether the transaction may ultimately be permitted under an applicable affirmative defense. The motion to dismiss is an important stage in litigation because, once a case proceeds beyond that point, plan sponsors often face increased pressure to settle in order to avoid the cost and risks of protracted litigation.

In response, there has been significant focus on whether the Cornell decision has led to increased litigation, whether more cases are progressing beyond the motion to dismiss stage, and whether courts have effectively used other tools to dismiss meritless claims. However, these discussions can overlook a more fundamental point: the importance of strong fiduciary governance. While any plan sponsor may be named in a lawsuit, along the lines of a fishing expedition, the most effective defense is to minimize the size of the target. That objective is best achieved through a careful, consistent, and well-documented governance process.

Who is a fiduciary?

A person is considered to be a “fiduciary” with respect to an ERISA plan to the extent he or she:

• Exercises authority over the management of a plan or the disposition of plan assets,
• Provides investment advice for a fee regarding plan assets; or
• Has any discretionary authority or responsibility in plan administration.

Fiduciary status is not only a result of being named as such but also determined by function. Examples of an individual performing a fiduciary function include the following:

• Appointing fiduciaries and delegating fiduciary and other plan-related duties and responsibilities
• Selecting/replacing plan service providers
• Determining investment policy and making investment decisions (funded arrangements)
• Approving payment of fees and expenses from plan assets
• Interpreting/construing plan provisions
• Deciding claims
• Functioning as the plan’s “administrator” (e.g., ensuring that government reporting and participant disclosure requirements are satisfied and that plan administration complies with the plan’s terms and relevant law)

What are the fiduciary requirements under ERISA?

ERISA requires that fiduciaries meet the following duties:

• Duty of loyalty. Known as the exclusive benefit rule, fiduciaries must discharge their duties solely in the interest of plan participants and beneficiaries. Fiduciaries must act to provide plan benefits and use plan assets only to pay for benefits and reasonable administrative expenses.
• Duty of prudence. Fiduciaries must act with the care, skill, prudence and diligence that a prudent person would use in similar circumstances.
• Duty of diversification. Fiduciaries must diversify plan investments to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
• Duty to follow plan documents and applicable law. Fiduciaries must act in accordance with plan documents and ERISA. Plans must be in writing, and a summary plan description of key terms should be provided to participants.

Fiduciaries also have a duty not to cause a plan to engage in prohibited transactions. While exemptions exist, these transactions generally involve dealings between the plan and “parties in interest” (i.e., individuals or entities with a relationship to the plan) and are restricted to prevent conflicts of interest and misuse of plan assets.

What is an effective governance process?

A defining feature of ERISA’s fiduciary requirements is the focus on the quality and rigor of the decision-making process at the time a decision is made. Fiduciaries are expected to act as a prudent person would under similar circumstances, exercising the care, skill, prudence, and diligence of a reasonable person familiar with such matters.

This standard is process-oriented and focuses on whether the fiduciary engaged in a thoughtful and well documented decision-making process. As part of satisfying this standard, fiduciaries are expected to recognize the limits of their own expertise and, where appropriate, engage and rely on qualified experts to assist in the evaluation, selection, and ongoing oversight of a plan’s investments and service providers. Examples could include legal counsel and benefits consultants, an investment consultant to assist with the selection and monitoring of investments, or the use of a third party to perform a market analysis of the fees and services provided by recordkeepers and other vendors paid with plan assets.

A fiduciary benefits committee can help demonstrate compliance with ERISA’s fiduciary standards by establishing and consistently following a clear governance framework. A written committee charter and related policies provide structure for the committee’s roles, responsibilities, and decision‑making processes, and adherence to those documents promotes consistency, accountability and discipline in fiduciary oversight. From a fiduciary perspective, it is not enough to have a governance framework in place. The committee must also operate in accordance with that framework, since following defined procedures is a key factor in demonstrating a reasoned and prudent fiduciary process under ERISA.

Delegating fiduciary duties

One way to strengthen fiduciary governance is to narrow the scope of responsibilities retained by the plan fiduciaries through prudent delegation to qualified third parties. Delegation does not fully eliminate fiduciary responsibility. Rather, it shifts the day-to-day exercise of particular functions while leaving the appointing fiduciaries responsible for the prudent selection and ongoing monitoring of the third party. In many cases, that monitoring role is more manageable and can help create a clearer, more disciplined governance structure.

Common examples include appointing an ERISA section 3(38) investment manager to assume discretionary responsibility for selecting and monitoring plan investments, delegating out certain administrative fiduciary functions to a third party, or using a pooled employer plan structure in which a pooled plan provider takes on both administrative and investment fiduciary responsibilities. Even when these arrangements are used, plan fiduciaries should maintain a documented process for evaluating and monitoring the provider. Delegation can be an effective risk-management tool, but it works best when it is paired with clear contracts, defined reporting expectations, and regular oversight.

Penalties for failure to comply with ERISA’s fiduciary requirements

The cost and risks from class action fiduciary litigation is the focus of many plan sponsors. However, the failure to adhere to ERISA’s fiduciary duties could result in various forms of civil and criminal penalties and even personal liability.

Civil penalties. The most common penalty for a breach of fiduciary duty involves paying damages to make the plan whole by restoring losses caused by the breach. Additionally, penalties may apply for failing to meet ERISA’s requirements, such as failing to file a Form 5500. The Department of Labor (DOL) could also charge a fine equal to 20% of an award or settlement when a fiduciary breach occurs.

Criminal penalties. ERISA fiduciaries may be subject to criminal penalties of up to a $100,000 fine and/or 10 years’ imprisonment for “willful violation” of ERISA. A corporation (including an employer plan sponsor) can face fines of up to $500,000 for large-scale misconduct. A fiduciary can also be subject to penalties and/or imprisonment for theft, embezzlement, mail fraud, wire fraud and the like.

Co-fiduciary liability. In some cases, fiduciaries can be liable for the breaches of other fiduciaries. This standard generally requires knowingly facilitating, covering up, or acquiescing in the other fiduciary’s breach.

Personal liability. Beyond government enforcement, ERISA creates direct personal liability for plan losses and/or profits made as a result of a breach. A court can also order removal of the fiduciary and any other equitable relief it considers appropriate.

An ounce of prevention is worth a pound of cure

A recent WTW governance survey found that four out of five employers plan to reevaluate their plan governance structure and/or policies within the next two years. Over 50% of employers plan to conduct fiduciary training and over 30% plan to reevaluate their existing fiduciary insurance policies.

If you have questions, please contact your WTW consultant.