The Mechanics of 401(k) Class Actions: How Individualized Accounts Complicate Fiduciary Litigation

For millions of Americans, a 401(k) account is their only engine for retirement wealth, making the competence of the employer who selects the investment options a critical financial stake. When those employers choose underperforming or overly expensive funds, employees have historically banded together in class-action lawsuits to recover the lost growth.[1][4]

That mechanism for accountability is now facing a structural threat. The financial stakes are massive; since 2021, gross settlements in these cases have exceeded $500 million. To achieve these numbers, plaintiffs' attorneys rely on class-action certification, which aggregates the relatively small losses of thousands of individual employees into a single, high-stakes legal proceeding.[4]

However, a fundamental reality of modern retirement savings is increasingly disrupting this litigation model. Unlike traditional defined benefit pensions—where assets are pooled and managed collectively—modern defined contribution plans, such as 401(k)s and 403(b)s, are inherently individualized.[1][5][6]

In a 401(k) plan, each participant directs their own account. They choose from a menu of mutual funds, index funds, and target-date funds. They decide how much to invest, when to buy, and when to sell. Consequently, if a specific fund underperforms, the financial impact varies wildly from one employee to the next.[4][5]

This individual variation forms the core of a potent legal defense against class certification. Defense counsel argue that because each participant's damages must be calculated independently based on their unique trading history, the claims cannot be efficiently resolved in a single class action.[3][4]

The legal battleground centers on the Federal Rules of Civil Procedure, specifically Rule 23, which governs class actions. Plaintiffs typically seek certification under Rule 23(b)(1), a provision designed for cases where separate actions would create a risk of inconsistent rulings. Crucially, a 23(b)(1) class is mandatory: members do not receive notice and cannot opt out.[1][5]

Plaintiffs argue that under the Employee Retirement Income Security Act (ERISA), fiduciary duties are owed to the plan as a whole, not to individual participants. Therefore, if an employer imprudently retains a bad fund, the breach affects the entire plan, justifying a mandatory, plan-wide class action.[1][6]

Defense attorneys counter that while the breach may be plan-wide, the resulting monetary claims are strictly individualized. They point to Supreme Court precedent establishing that when class members have individualized claims for money, the case belongs under Rule 23(b)(3).[4][5]

Rule 23(b)(3) imposes a much higher bar. It requires plaintiffs to prove that common questions of law or fact "predominate" over individual issues. Furthermore, it mandates that class members receive notice and the opportunity to opt out of the litigation—a costly and logistically complex requirement.[3][5]

The U.S. Court of Appeals for the Fourth Circuit recently crystallized this defense in Trauernicht v. Genworth Financial Inc. In that case, former employees sued Genworth, alleging the company imprudently retained underperforming BlackRock target-date funds in its 401(k) plan.[1][6]

A district court initially certified a mandatory class of over 4,000 participants under Rule 23(b)(1). However, the Fourth Circuit reversed the decision, ruling that claims seeking recovery for investment losses in defined contribution plans are inherently individualized monetary claims.[1][2][6]

The appellate panel emphasized that because 401(k) recoveries flow to individual accounts based on specific, varied losses, they cannot be bundled into a mandatory class without violating due process. The court noted that some participants might have even benefited from the investments, while others suffered losses in different years.[5][6]

Following the panel's decision, the plaintiffs petitioned for an en banc rehearing, arguing the ruling fundamentally misinterpreted ERISA and conflicted with other circuit courts. In June 2026, the full Fourth Circuit declined to rehear the case, cementing the precedent.[6]

Legal analysts note that this interpretation forces plaintiffs to pursue certification under the more rigorous Rule 23(b)(3) standard. To survive the "predominance" test, plaintiffs' counsel must develop expert evidence demonstrating that damages can be calculated formulaically, while defense counsel will present competing experts to highlight the unmanageable nature of individual inquiries.[3]

If the Fourth Circuit's reasoning is adopted by other jurisdictions, it could significantly alter the economics of ERISA litigation. Without the streamlined mechanism of mandatory class certification, the logistical hurdles and costs of pursuing these claims may deter some lawsuits entirely, reshaping how fiduciary accountability is enforced in the retirement industry.[2][5]