Increasing Prohibited Transaction Claims in ERISA Class Action Litigation

AIG and O’Melveny & Myers LLP analyze a troubling trend in prohibited transaction claims and the appeal of such claims to plaintiffs’ counsel.

Key highlights include:

Recent proliferation of ERISA litigation has challenged the investment options and expense structures of 401(k) and other defined contribution plans, including claims asserting violations of ERISA §406’s prohibited transaction provisions.
Such claims have appeal to plaintiffs’ counsel in part because they create liability for plan fiduciaries engaging in broad categories of transactions (including ones necessary to operate a benefit plan) unless a statutory or regulatory exemption applies.
Some court reactions have placed the burden on fiduciaries to prove compliance with highly technical and amorphous conditions of exemptions.
As a result, prohibited transaction claims have helped feed what has proven for defendants to be an expensive and nettlesome wave of litigation - leading fiduciaries in many cases to settle, with amounts paid commonly ranging well into the tens of millions of dollars.

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