Key Points

• ERISA class actions targeting voluntary benefits are on the rise. Plaintiffs allege employers and brokers breached fiduciary duties through self-dealing and excessive commissions.
• The strongest defense is proving ERISA doesn't apply. The DOL safe harbor exempts programs where the employer doesn't contribute, participate, or endorse beyond minimal involvement.
• Employers should take proactive steps now. Audit safe harbor compliance, document governance processes, and map all service provider compensation.

Employers offering voluntary benefit programs such as accident and critical illness insurance face a growing wave of ERISA class action lawsuits alleging fiduciary breaches and excessive broker commissions, with plaintiffs seeking disgorgement and plan loss recovery. For employers who have historically treated voluntary benefits as low-risk, employee-funded offerings, these cases demand immediate attention and a proactive defense posture.

The Claims at a Glance

The complaints follow a consistent theory: Employers and brokers allegedly steered participants toward high-commission, low-value insurance products, resulting in excessive premiums. Plaintiffs seek disgorgement, fiduciary removal and plan loss recovery. Recent filings include granular data on commission rates and loss ratios. For example, one complaint alleges broker commissions of approximately 38.6% of premiums (nearly four times the roughly 10% market rate) and loss ratios below 50%. Other filings allege that employers never conducted requests for proposal (RFP) and that brokers provided things of value to employers in exchange for permitting excessive commissions.

The Threshold Defense: ERISA Does Not Apply

The strongest line of defense remains establishing that the Employee Retirement Income Security Act (ERISA) does not govern the voluntary benefit program in the first place. Under the Department of Labor safe harbor at 29 C.F.R. § 2510.3-1(j), a group insurance arrangement is exempt from ERISA if the following four conditions are met: (1) the employer does not pay or contribute to premiums; (2) the employer receives no compensation beyond reasonable administrative costs; (3) participation is entirely voluntary; and (4) the employer does not endorse the program beyond permitting payroll deductions and facilitating advertising.

The fourth condition — endorsement limitation — is the primary point of attack in these cases. Plaintiffs argue that use of employer logos, integration into employer-branded enrollment platforms, or employer assistance with claims administration constitutes endorsement sufficient to bring the program within ERISA's scope. Employers who can demonstrate strict separation between voluntary programs and their broader benefits infrastructure will be best positioned to defeat these claims.

Fiduciary Breach Theories: Know the Allegations

If ERISA coverage is established, plaintiffs advance several theories of fiduciary breach:

• Broker self-dealing. Brokers allegedly curated high-commission options while withholding lower-cost alternatives, prioritizing commission revenue over participant interests.
• Employer failure to monitor. Employers allegedly failed to establish processes ensuring reasonable compensation and prudent administration of voluntary benefit programs.
• Commingling of plan assets. Revenue generated from voluntary benefit premiums was allegedly redirected to subsidize other services, violating ERISA's exclusivity requirement.
• Expanding third-party liability. More recent filings add claims for knowing participation in fiduciary breach and prohibited transactions against broker defendants.

Practical Steps to Strengthen Your Defense

Employers should take the following actions now to mitigate exposure and build a defensible record:

Preserve the safe harbor. Audit current voluntary benefit programs against all four safe harbor criteria. If possible, maintain a "hands off" posture by avoiding employer logos on program materials and keeping voluntary benefits visually and administratively distinct from employer-sponsored plans. Ensure communications clearly characterize these programs as voluntary and employee-funded.

Implement fiduciary governance (if ERISA applies). Where a plan sponsor affirmatively elects to have the voluntary benefits program treated as an ERISA-covered employee welfare benefit plan, the sponsor should establish a robust fiduciary governance framework commensurate with that designation. This means adopting the same oversight processes that the organization already applies to its retirement and group health plans. The governance framework should address three core areas: broker and consultant compensation, carrier selection and retention, and ongoing plan performance monitoring. Plan fiduciaries should regularly benchmark premiums, commissions and fee arrangements against prevailing industry standards, and should periodically evaluate carrier loss ratios and claims experience to confirm that the plan continues to operate in the best interests of participants. By embedding these practices into a documented governance process, the plan sponsor can demonstrate procedural prudence and reduce the risk of fiduciary liability under ERISA's duty of prudence and duty of loyalty standards.

Document everything. Maintain records of all decision-making processes, selection criteria and monitoring procedures. Retain written analyses supporting the reasonableness of compensation arrangements, including benchmarking studies or market comparisons.

Map service provider compensation. Develop a comprehensive view of all direct and indirect compensation received by brokers, consultants and carriers. Explicitly define fiduciary or non-fiduciary roles in service agreements and identify and eliminate or disclose any cross-subsidization between plans.

The Bottom Line

The plaintiffs' bar is refining its approach with each new filing, and additional employers will likely face similar challenges in the coming months. However, employers who act now by shoring up safe harbor compliance, implementing documented governance processes, and ensuring arm's-length relationships with service providers will be well-positioned to defend against these claims or avoid them entirely. Our team stands ready to assist in evaluating your voluntary benefit programs, assessing litigation exposure and implementing the oversight frameworks necessary to mount a strong defense.

For more information, please contact José M. Jara at jjara@foxrothschild.com, Traci M. Clements at tclements@foxrothschild.com or another member of Fox Rothschild’s ERISA Litigation Practice Group.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.