Sixth Circuit: 401(k) Individual Arbitration Clause Not Enforceable

On August 20, 2024, the Sixth Circuit ruled in Parker v. Tenneco, Inc., that 401(k) plan provisions mandating individual arbitration are invalid as a prospective waiver of rights and remedies guaranteed under ERISA.

Tanika Parker and Andrew Farrier (the plaintiffs) were employees of and participants in 401(k) plans sponsored by subsidiaries of Tenneco Inc. Together, they sued in federal court on behalf of the plans, themselves, and other similarly situated participants through a putative class action, alleging breaches of fiduciary duties owed pursuant to ERISA. Specifically, the plaintiffs claimed that the plans’ fiduciaries breached their duties by failing to employ a prudent process for selecting, monitoring, and removing investment options from the plans’ menus. This resulted in investment options that were nearly identical to other available options but were more expensive. Furthermore, the plaintiffs alleged that the fees charged for services, recordkeeping, and account administration were higher than other comparable fees and services.

In terms of relief for these breaches, the plaintiffs requested “all losses caused by their breaches of fiduciary duties,” restoration of “any profits resulting from such breaches,” and “equitable relief and other appropriate relief.” The plan fiduciaries moved to compel individual arbitration, arguing that the plans’ individual arbitration provision compelled arbitration of Parker and Farrier’s claims on an individual basis and barred them from suing on behalf of the plans or in a representative capacity. The district court denied the motion, stating that the individual arbitration provision limited participants’ rights under ERISA because it eliminated their substantive statutory right to bring suit on behalf of a plan and pursue plan-wide remedies.

The Sixth Circuit affirmed the district court under the “effective vindication doctrine,” which holds that provisions within an arbitration agreement may not prevent a party from effectively vindicating statutory rights. As such, the plans’ individual arbitration provision was unenforceable. In support of its decision, the court cited similar reasoning used by the Third, Seventh, and Tenth circuit courts in past cases as well as the Second Circuit’s decision in Cedeno v. Sasson earlier this year.

While this decision adds to what appears to be a growing consensus in favor of the effective vindication doctrine, the effect of mandatory arbitration provisions in benefit plans subject to ERISA remains a developing area of the law. Plan sponsors that already include such language in their plans or are considering including such language in their plans should consult closely with counsel before making any ultimate determinations in that regard.

Parker v. Tenneco, Inc.