Ninth Circuit Throws a Flag on 401(k) Class Certification

Another federal court of appeals recently vacated a class certification order in a breach of fiduciary duty case under the Employee Retirement Income Security Act (ERISA) involving a defined contribution retirement plan. The Ninth Circuit’s decision in Munoz v. Alorica Inc. reflects arguments that plan sponsors and other defendants can use to resist class certification in similar defined contribution plan litigation.

In Munoz, former participants in the Alorica 401(k) retirement plan brought ERISA claims alleging that plan fiduciaries mismanaged investment options and overpaid for record-keeping services. The district court certified a class, and the defendants appealed under Federal Rule of Civil Procedure 23(f). The Ninth Circuit vacated the certification order and remanded, although it rejected the defendants’ standing arguments.

The appellate court found that the district court analyzed typicality only with respect to the plaintiffs’ record-keeping fee theory and failed to address whether differences between investment options rendered the named plaintiffs’ claims atypical of the class with respect to the separate imprudent-investment theory of liability. Because Rule 23 requires a rigorous analysis of each certification prerequisite, this omission alone warranted vacatur.

The court also noted that the district court did not adequately consider evidence of a possible intraclass conflict. The defendants had presented evidence that, under the plaintiffs’ own loss model, converting record-keeping fees to an asset-based fee structure would have resulted in some class members paying higher fees than they actually paid during the class period. In other words, the remedy the named plaintiffs sought could be detrimental to certain class members. The district court dismissed this concern based only on the dollar amount the named plaintiffs personally paid in fees, without resolving the broader factual dispute about how the proposed loss methodology would affect other class members. The Ninth Circuit held that this failure to resolve a “key factual dispute” bearing on adequacy of representation was error.

Notably, however, the Ninth Circuit preserved the plaintiffs’ standing to sue over investment options they had not personally invested in and over the record-keeping claim, holding that such distinctions go to class certification, not Article III standing. The decision is therefore not a wholesale rejection of the case, but it confirms that the certification analysis demands an evidence-based inquiry rather than a generalized finding that claims are common or that representation is adequate.

Munoz comes on the heels of the Fourth Circuit’s recent decision in Trauernicht v. Genworth Financial Inc., on which we have previously reported. Read together, the two decisions reflect a consistent appellate message: courts asked to certify ERISA classes in the defined contribution context must conduct a rigorous, evidence-based analysis of Rule 23’s prerequisites. Several arguments recur across both cases and are likely to be useful in future class certification challenges involving 401(k) and other defined contribution plans:

• Defined contribution plans are structurally different from defined benefit plans for class certification purposes. Because losses are tied to individual accounts rather than a common pool of funds, recoveries are inherently individualized, undermining certification under Rule 23(b)(1) and weakening arguments for inherent commonality.
• Evidence of uninjured class members defeats commonality. Where a defendant can show, using appropriate comparators or loss models, that a meaningful segment of the class suffered no injury, or actually benefited (such as lower record-keeping fees than proposed by plaintiffs), courts should not certify a class that lumps injured and uninjured members together.
• Multiple theories of liability each require their own Rule 23 analysis. A court cannot certify a class based on a rigorous analysis of one theory (e.g., record-keeping fees) while assuming the same conclusions apply to a different and distinct theory (e.g., imprudent investment selection).
• Evidence of intraclass conflicts cannot be ignored. Where a proposed remedy or loss methodology could disadvantage some class members relative to others, courts must resolve that conflict as part of the adequacy-of-representation inquiry.
• Rule 23’s requirements must be tested, not presumed. Both appellate courts vacated certification orders in part because the district courts treated commonality, typicality, or the propriety of Rule 23(b)(1) treatment as flowing automatically from the nature of an ERISA fiduciary breach claim, rather than testing the record.

For defendants facing class certification motions in defined contribution plan litigation, both decisions support developing a robust evidentiary record early — including expert analysis of account-level loss modeling, comparator funds (which were a central issue in Trauernicht), and the practical effects of any proposed remedy on different segments of the putative class — to demonstrate that the class, as defined, does not share a common injury and that named plaintiffs’ claims and interests are not typical of, or aligned with, the class they seek to represent.