Fourth Circuit Overturns Class Certification of 401(k) Plan Investment Loss Case

Key Takeaways

• Fourth Circuit rejects Rule 23(b)(1) for defined contribution plans.
• Commonality requirement must be proven; not all funds lost.
• Individualized damages must follow Rule 23(b)(3) safeguards.
• Ruling may deter 401(k) loss class actions nationwide.
• Defense can challenge certification early, limiting class size.

Summary

The Fourth Circuit reversed a district court ruling that had certified a class action against Genworth Financial over alleged underperformance of BlackRock target‑date funds in 401(k) plans. The appellate court held that Rule 23(b)(1) cannot be used for defined‑contribution plans because losses flow to individual accounts, not to the plan as a whole. It also sent the case back to assess whether the commonality requirement of Rule 23(a)(2) is met, noting that many participants suffered no loss. The decision could reshape how ERISA‑based 401(k) lawsuits are litigated.

Pulse Analysis

The Fourth Circuit’s decision draws a sharp line between defined‑benefit and defined‑contribution retirement plans under ERISA. While defined‑benefit plans pool assets to pay uniform benefits, defined‑contribution plans allocate assets to individual accounts, meaning any fiduciary breach translates into personal losses. Supreme Court precedent already requires individualized monetary claims to follow Rule 23(b)(3), which provides notice and opt‑out rights. By applying that framework, the appellate court emphasized that mandatory class certification under Rule 23(b)(1) is inappropriate for 401(k) cases where damages are inherently personal.

In its opinion, the court also questioned the district court’s blanket finding of commonality. Because the BlackRock target‑date funds performed comparably—or even better—than passive benchmarks for a substantial portion of the plan’s assets, many participants did not suffer any injury. The Fourth Circuit therefore remanded the case to conduct a rigorous analysis of whether the four Rule 23(a) criteria, especially commonality, truly exist. This heightened scrutiny forces plaintiffs to demonstrate that every—or at least a clearly defined—segment of the class experienced a uniform loss, raising the evidentiary bar for class certification at the early stage of litigation.

Practically, the ruling equips plan sponsors and fiduciaries with a powerful early‑motion tool. Defense counsel can now argue that individualized damages belong in a Rule 23(b)(3) proceeding, invoking due‑process protections and potentially shrinking the class to only those who can prove actual loss. If other circuits adopt this reasoning, the plaintiffs’ bar may retreat from costly 401(k) loss suits, reshaping the landscape of ERISA litigation and prompting sponsors to proactively review fund offerings and disclosure practices to mitigate future claims.