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ERISA Fiduciary Duties and PBM Oversight: Emerging Litigation and Considerations for Plan Sponsors

September 29, 2026

ERISA Fiduciary Duties and PBM Oversight: Emerging Litigation and Considerations for Plan Sponsors¹
By Jaden Jackson

I. Introduction

The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to enhance protections for employees’ retirement and health benefits. ERISA requires employers and others acting as plan fiduciaries to manage benefit plans with prudence and loyalty. This fiduciary duty represents the highest standard of care recognized under the law² and serves as a critical safeguard in the administration of both retirement and employer-sponsored health and welfare plans.

Recent lawsuits have focused on pharmacy benefit managers (PBMs) in self-funded health plans. PBMs help manage prescription drug benefits and are increasingly seen as essential service providers to group health benefit plans. Yet, their practices have come under public, policymaker, and legal scrutiny due to rising drug costs and concerns over transparency.

This white paper aims to:

1. Define the fiduciary duty and its relevance to plan sponsors;
2. Review ongoing litigation involving alleged breaches of fiduciary duty in PBM arrangements; and
3. Provide key considerations relating to fiduciary obligations when managing PBM relationships.

II. Fiduciary Duty and Its Application to Plan Sponsors

ERISA fiduciaries must act in the best interests of plan participants and beneficiaries.³ Two central obligations are the duties of loyalty and prudence.

First, an ERISA fiduciary must run the plan exclusively in the interests of the plan participants and beneficiaries for the purpose of providing benefits and paying plan expenses. In other words, fiduciaries must act with undivided loyalty to the plan participants. When acting as fiduciaries, they must not subordinate participants’ interests to their own or those of third parties. An ERISA fiduciary is prohibited from using the plan to engage in self-dealing or create a benefit to third parties at the expense of plan participants.

Second, an ERISA fiduciary must exercise the same level of care, skill, prudence, and diligence that a reasonably prudent person would exercise under similar circumstances. This includes careful evaluation of service providers, investment options, and cost structures. One common example of acting prudently would be diversifying a plan’s investments to mitigate the risk of large losses. Fiduciaries must also follow plan documents to the extent they are consistent with ERISA.

So, who qualifies as a fiduciary?
Importantly, an employer does not act as an ERISA fiduciary every time it makes a decision affecting an employee benefit plan. Decisions concerning the design, establishment, amendment, or termination of a plan generally are considered “settlor” functions rather than fiduciary acts. Fiduciary status can arise from discretionary plan management or administration, or from exercising any authority or control over the management or disposition of plan assets.

Fiduciary status depends on a person’s functions, not title. Under ERISA, a person is a fiduciary to the extent the person exercises discretionary authority or control over plan management, exercises any authority or control over plan assets, has discretionary authority or responsibility for plan administration, or provides investment advice for a fee or has authority or responsibility to do so.

These fiduciary obligations apply not only to retirement plans but also to welfare benefit plans, such as group health plans, for which fiduciaries exercise discretion over plan management or assets. Employers, employee organizations, or joint boards may sponsor these plans. When acting as fiduciaries in selecting and monitoring service providers, they retain responsibility for a prudent selection and monitoring process even when other functions are delegated.⁴

III. Emerging ERISA Litigation Concerning PBM Oversight

A growing number of lawsuits are testing the reach of ERISA’s fiduciary obligations in connection with employers’ management of prescription drug benefits and PBM relationships. Although plaintiffs have encountered significant threshold obstacles&emdash;particularly Article III standing&emdash;recent decisions have begun to address the substantive boundaries between fiduciary conduct, plan-design decisions, and ERISA’s prohibited-transaction rules. Together, these cases identify emerging areas of litigation risk for plan sponsors and fiduciaries.

Key Cases and Developments

Knudsen v. MetLife⁵
In Knudsen v. MetLife, the plaintiffs, who were participants in MetLife’s employee benefit plan, alleged that MetLife breached its fiduciary obligations by improperly retaining approximately $65 million in drug rebates rather than allocating those amounts to the plan. The self-funded plan had contracted with a PBM to negotiate discounts and rebates with drug manufacturers, and the plan document expressly stated that rebates would be applied to plan expenses and would not be considered when calculating copayments or coinsurance. Nevertheless, plaintiffs argued that MetLife caused the participants to pay higher out-of-pocket costs (mainly in the form of premiums) because the funds could have been used to reduce ongoing contributions and cost-sharing or distributed to participants.

The U.S. District Court for the District of New Jersey dismissed the complaint, finding that plaintiffs lacked standing.⁶ To establish standing, plaintiffs must show (1) a particularized injury-in-fact that is (2) caused by the defendant, and (3) would likely be redressed by a favorable court decision. The District of New Jersey reasoned that plaintiffs could not claim an individualized injury because, as plan participants, they had no legal right to the general pool of plan assets.

On September 25, 2024, the Third Circuit Court of Appeals affirmed the dismissal and agreed that plaintiffs had failed to demonstrate an injury-in-fact. The appellate court reasoned that, while plaintiffs had argued generally that their out-of-pocket (OOP) costs had increased, they did not specify key details such as which costs, in what years, or by how much. Moreover, the complaint did not sufficiently allege that rebates were used to calculate participants’ costs under the plan documents or that applying the rebates would lower those costs.

Although the case resulted in a dismissal, the Third Circuit left open the possibility of establishing financial injury under other circumstances, such as a showing that plan participants were charged more in premiums than allowed under the plan documents.

Lewandowski v. Johnson and Johnson⁷
The plaintiffs in Lewandowski v. Johnson and Johnson, also in the U.S. District Court for the District of New Jersey, faced a similar outcome. Like Knudsen, Lewandowski involved allegations that plan mismanagement increased participants’ costs. The original plaintiff, who had participated in the company-sponsored medical plan, argued that the company had mismanaged its prescription drug program and consequently caused the participants to pay higher OOP health care costs (in the form of higher premiums and higher costs for medications).

Although Lewandowski alleged specific prescription overpayments, the court dismissed her fiduciary-breach claims on January 24, 2025. ⁸ It found her higher-premium theory speculative. Her prescription-specific allegations established injury and traceability, but the court held that relief would not redress that injury because she had reached her annual prescription-drug out-of-pocket cap in each relevant year.

In an effort to address the standing deficiencies identified by the court, the plaintiffs’ Second Amended Complaint added Robert Gregory, a J&J retiree who alleged that he had not reached his applicable out-of-pocket maximum, as an additional plaintiff. The court again dismissed the fiduciary-breach claims on November 26, 2025, concluding that the plaintiffs had not established Article III standing because the alleged connection between the challenged prescription drug spending and participants’ individual costs remained insufficient.⁹ Rather than amend again, Lewandowski filed a notice of appeal on January 16, 2026. The appeal remains pending in the Third Circuit, where the parties have briefed whether the plaintiff’s alleged prescription-specific overpayments constitute a sufficiently concrete, traceable, and redressable injury under Article III.¹⁰

Navarro v. Wells Fargo
Courts outside the Third Circuit have relied on Knudsen and Lewandowski. In Navarro v. Wells Fargo, the U.S. District Court for the District of Minnesota, within the Eighth Circuit, dismissed a similar challenge for lack of standing.¹¹ Like Knudsen and Lewandowski, the court dismissed the matter for lack of standing. While the court agreed with the plaintiffs’ standing argument “in theory,” it found that the alleged harm was too speculative and not redressable. The court reasoned that “the connection between what Plan participants were required to pay in contributions and out-of-pocket costs, and the administrative fees the Plan was required to pay the PBM, is tenuous at best.”¹²

After the initial dismissal, the court vacated the judgment and allowed amendment. Plaintiffs filed an amended complaint adding another plaintiff on May 8, 2025. The court again dismissed the action for lack of standing on March 3, 2026,¹³ and plaintiffs appealed to the Eighth Circuit.¹⁴

Seth Stern et al. v. JPMorgan Chase & Co.¹⁵
In Stern v. JPMorgan Chase & Co., filed March 13, 2025, participants similarly alleged that the company mismanaged prescription drug benefits, resulting in excessive drug spending, higher participant costs, and suppressed wages. The complaint also challenged spread pricing and rebate retention.¹⁶ In support, Plaintiffs alleged that the plan and its participants were charged $6,229 for a 30-unit teriflunomide prescription, compared with cash prices of $11.05 to $34.71 at the pharmacies that were identified.

On March 9, 2026, the court granted JPMorgan’s motion to dismiss in part and denied it in part.¹⁷ Unlike the plaintiffs in the earlier cases, the Stern plaintiffs adequately pleaded standing based on specific prescription overpayments. The court nevertheless dismissed the fiduciary-breach claims with prejudice because they challenged settlor and corporate conduct rather than fiduciary acts. The court allowed the plaintiffs’ prohibited-transaction claims to proceed, however, based on allegations concerning transactions between the plan and its PBM, CVS Caremark. The decision therefore illustrates both a potential pathway around the standing problems encountered in earlier PBM cases and an important limitation: ERISA’s fiduciary duties apply only when an employer or plan administrator is acting in a fiduciary capacity.

Notably, the court in Stern subsequently relied on a recent Supreme Court Decision, Cunningham v. Cornell University,¹⁸ in allowing the plaintiffs’ prohibited-transaction claims concerning the plan’s PBM relationship to survive dismissal. Cunningham held that plaintiffs asserting certain prohibited-transaction claims under ERISA § 406 need not plead facts demonstrating that statutory exemptions under § 408 are inapplicable. Instead, those exemptions operate as affirmative defenses. Although Cunningham involved retirement-plan service providers rather than a PBM, the decision lowers an important pleading hurdle for prohibited-transaction claims involving plan service providers.

Implications of the Litigation
The litigation remains at an early stage, and plaintiffs have encountered significant obstacles&emdash;particularly in establishing Article III standing and demonstrating that the challenged employer conduct was undertaken in a fiduciary capacity. At the same time, Stern demonstrates that carefully pleaded allegations of specific participant overpayments may overcome the standing problems that resulted in dismissal of earlier cases. And following the Supreme Court’s decision in Cunningham, prohibited-transaction theories involving PBM service arrangements may receive increasing attention.

Despite the unresolved nature of these cases, their broader implications are clear: plan sponsors should anticipate heightened scrutiny from plan participants, regulators, and courts. Given PBMs’ influence over prescription drug costs and access, plan sponsors must approach PBM relationships with the same level of care, due diligence, and oversight required of any critical service provider.

IV. Key Considerations for Plan Sponsors

Expectations surrounding PBM oversight are evolving. As recent lawsuits illustrate, commonly used contractual arrangements&emdash;such as rebate-sharing agreements, spread pricing models (where PBMs charge plan sponsors more than they reimburse pharmacies), and performance guarantees (performance guarantees tied to service or cost targets)&emdash;are increasingly subject to legal and regulatory scrutiny.

Federal policymakers have also moved toward substantially greater transparency in PBM contracting. The Consolidated Appropriations Act, 2026 amended ERISA to impose new requirements on PBM arrangements with group health plans, including expanded reporting and compensation-disclosure requirements and, when applicable, pass-through of specified rebates and other remuneration.¹⁹ Separately, the Department of Labor has proposed regulations that would require PBMs serving self-insured ERISA plans to make detailed disclosures concerning their compensation and financial arrangements.²⁰ As of September 2026, that rulemaking remains ongoing. Together, these developments reinforce the growing expectation that plan fiduciaries understand how their PBMs are compensated and have sufficient information to evaluate the reasonableness of those arrangements.

States are pursuing similar transparency measures. For example, Colorado enacted HB 25-1094 in 2025, with its principal requirements taking effect January 1, 2027. The law requires covered PBM contracts to provide for disclosure of prescription drug costs, claims-level pharmacy data, and specified PBM income.²¹ The law also requires a contractual provision that allows for an annual audit of the PBM by the health benefit plan.²²

Fiduciaries overseeing PBM contracts should address the legal and financial risks of inadequate oversight. The following practices can support a prudent selection and monitoring process.

1. Engage in a Competitive Selection Process

A prudent selection process generally should include consideration of reasonable alternatives and meaningful comparison of available providers. Contracting with a PBM takes time and resources, but it is important that plan sponsors act prudently during the selection process. This begins with establishing a procurement process that requires PBMs to compete amongst each other (and other pharmacy service providers) against plan-specific standards and goals. The selection process should be well documented and include a thorough evaluation of potential providers, their service, and respective fees.

2. Consider Alternative Models

Plan sponsors should evaluate alternative models when contracting for pharmacy benefit services, as traditional PBM arrangements are often opaque and permit PBMs to retain rebates that can be considered assets of the plan. In contrast, rebate pass-through models offer greater transparency by requiring PBMs to pass through all rebates covered by the contract, while charging a clearly defined administrative fee. Hybrid models are also available, combining aspects of both traditional and pass-through structures. Additionally, sponsors may want to consider partnering with a “lowest net cost” PBM. These PBMs operate solely on a flat administrative fee, with no spread pricing, rebate retention, or percentage-based compensation&emdash;offering maximum alignment with the plan sponsor’s goals of lower beneficiary premiums, lower patient cost-sharing, and cost savings to the plan.

3. Ensure Contractual Accountability

Before signing a PBM contract, a plan sponsor should conduct a thorough review of the contract to identify and mitigate potential risks. Plan sponsors should require transparent pricing and insist on the full pass-through of rebates and discounts. Provisions that permit the PBM to retain rebates or offer only aggregate financial reporting should raise concern, as they hinder accountability. Without detailed reporting, plan sponsors will have difficulty determining whether rebates are remitted as required by the contract and applicable law.

Review PBM agreements for provisions that unlawfully restrict access to or sharing of cost, quality, or claims information. Plans must comply with the federal gag-clause prohibition and applicable attestation requirements. Contracts should also preserve meaningful audit rights and access to the data needed for oversight, subject to applicable privacy protections. Full data access is essential for oversight, performance monitoring, and fiduciary compliance.

Finally, health plan fiduciaries should be aware of the practice of spread pricing and know how much the PBM receives under such an agreement. Knowing exactly how much the PBM earns under spread pricing is critical for ensuring the plan is not overpaying and that cost-saving opportunities are not being lost.

4. Continue to Monitor Activity After the Contract Begins

Prudent oversight continues after selection. Plan fiduciaries should review quarterly and annual performance data, perform independent audits periodically, and consistently benchmark PBM performance. The review process can also include comparing actual fees and rebates against contract projections and reviewing vendors for conflicts of interest. Most importantly, a fiduciary should document vendor negotiations, audits, cost analyses, decisions, and other oversight activities.

5. Engage Fiduciary Advisors or Consultants

Plan sponsors should periodically assess their own oversight practices as well as their PBMs’ practices. An independent benefits consultant or lawyer can help evaluate existing contracts and identify improvements. Sponsors should assess the adviser’s compensation and potential conflicts involving PBMs.

V. Conclusion

As the landscape of employer-sponsored health benefits continues to evolve, plan sponsors should recognize that ERISA’s fiduciary responsibilities extend well beyond traditional retirement plans. The emerging litigation concerning PBM arrangements reflects increasing scrutiny of how employers and other plan fiduciaries oversee prescription drug benefits. Although plaintiffs in several cases have struggled to establish Article III standing, more recent decisions have begun to define both the potential pathways and limitations of these claims. In particular, Stern demonstrates that allegations of specific participant overpayments may satisfy standing requirements while also underscoring the important distinction between fiduciary conduct and settlor plan-design decisions. At the same time, prohibited-transaction theories have assumed greater significance following the Supreme Court’s decision in Cunningham.

Plan sponsors acting as fiduciaries should use a documented process to compare PBM options, evaluate pricing and compensation, secure meaningful contractual protections, and monitor performance. Independent advisers can support that process. These practices can help sponsors meet their obligations and manage potential liability while improving oversight of prescription drug benefits.

Jaden Jackson is an Associate at Christie 55 Solutions, where he supports clients across multiple sectors on public policy, regulatory, and government affairs matters. He is admitted to practice law in New Jersey. Jaden earned his J.D. from Seton Hall University School of Law in 2022 and his B.A. from Montclair State University in 2017.