SCOTUS Clarifies Pleading Standards for ERISA Prohibited Transaction Claims and Raises Litigation Concerns for Plan Sponsors
May 06, 2025
On April 17, 2025, the Supreme Court of the United States unanimously held in Cunningham v. Cornell University that ERISA plan participants alleging a fiduciary breach need only plead that a prohibited transaction occurred. The burden then shifts to plan fiduciaries to assert and prove that an exemption applies. The decision, which resolved a split among the federal circuit courts regarding the proper pleading in ERISA litigation, makes it easier for participants to bring prohibited transaction claims and may increase litigation brought against ERISA plan fiduciaries.
The Background
ERISA plan fiduciaries must fulfill certain fiduciary duties, including the duty of loyalty, which requires fiduciaries to act solely in the interest of plan participants and avoid engaging in transactions that may harm the plan. Specifically, ERISA Section 1106(a)(1) prohibits a fiduciary from causing the plan to enter certain transactions with “parties in interest,” which include plan insiders (e.g., the plan administrator, sponsor, and its officers) and, importantly, plan service providers. ERISA Section 1108 separately provides 21 exemptions to prohibited transactions, including Section 1108(b)(2)(A), for contracts between a plan and a party in interest for necessary plan services if no more than reasonable compensation is paid. Accordingly, plan contracts with service providers would invariably be prohibited transactions if not for the Section 1108(b)(2)(A) exemption.
In this case, the plaintiffs represent a class of current and former Cornell University employees who participated in two defined-contribution retirement plans from 2010 to 2016. In 2017, they sued Cornell and other plan fiduciaries for allegedly causing the plans to engage in prohibited transactions for recordkeeping services with TIAA and Fidelity. The plaintiffs argued that because TIAA and Fidelity are service providers and hence parties in interest, their furnishing of recordkeeping and administrative services to the plans is a prohibited transaction unless Cornell proves an exemption. The defendants asserted that it is the plaintiffs who must allege that no prohibited transaction exemption applied. The district court dismissed the plaintiff’s prohibited transaction claim, and the Second Circuit affirmed. The Second Circuit held that to survive a motion to dismiss, the plaintiffs must plead not just that the plan entered a transaction for recordkeeping services but that the transaction was unnecessary or involved unreasonable compensation.
The Supreme Court’s Decision
The Supreme Court reversed the Second Circuit’s decision, holding that when a statute has exemptions that are separate from but refer to prohibited conduct, the exemptions are affirmative defenses that are the entire responsibility of the party raising them. In the Court’s view, it would make little sense to put the onus on the plaintiff participants to plead and disprove any potential exemption, when the facts supporting the basis for the exemption would likely be in the defendant fiduciary’s possession. This means that participants asserting a fiduciary breach claim for a prohibited transaction must only plead that the plan fiduciary engaged in a plan transaction with a service provider. The burden then shifts to the plan fiduciary to assert that an exemption applies (e.g., that the transaction involved necessary plan services for reasonable compensation).
The Court acknowledged the defendants’ concern that the decision could invite “an avalanche of meritless litigation” because plaintiffs asserting a prohibited transaction claim could too easily get past the motion to dismiss stage and subject defendants to costly and time-intensive discovery. However, the Court noted that district courts can use various legal tools to screen out meritless claims before discovery. For example, a district court could require a plaintiff to file a reply (to a defendant’s answer that a prohibited transaction exemption applies) setting forth specific, nonconclusory factual allegations as to why the exemption does not apply and dismissing the claim if the plaintiff fails to. Additionally, district courts can dismiss claims for lack of standing if the plaintiff fails to allege a concrete injury. For claims that proceed past the motion to dismiss stage, the Court observed that district courts could expedite or limit discovery to mitigate unnecessary costs, impose sanctions for meritless claims, and shift litigation costs (including reasonable attorney’s fees) to the other party. The case was remanded for further proceedings consistent with the opinion.
Employer Takeaway
This decision is unwelcome news for employers that sponsor ERISA plans and may have the practical effect of increasing fiduciary breach claims brought by participants against plan fiduciaries. Of course, the fact pattern here involves retirement plans. Although most private group health plans are subject to ERISA and its prohibited transaction rules, there are distinctions between retirement and group health plans with respect to typical plan funding and the use of plan assets to pay plan expenses. Accordingly, the impact of the decision with respect to group health plans is not entirely clear but is a development for all plan fiduciaries to monitor.
In any event, the case serves as an important reminder that all plan sponsors should ensure they are prepared to demonstrate they engaged in a prudent process when selecting plan service providers, including verifying that the service providers’ compensation is reasonable. Sponsors should carefully document their vendor selection decision-making process. Prior to entering a contract or arrangement, both retirement and group health plan sponsors should receive and carefully review each service provider’s ERISA Section 408(b)(2) compensation disclosure and benchmark their fees for reasonableness. They should also verify that the terms of any resulting contract clearly and accurately specify the scope of plan services to be provided and the service provider’s compensation. Maintaining written records, including those relating to selection and monitoring of service providers, will be particularly important if the employer ever needs to defend a prohibited transaction claim by asserting that a plan service provider received no more than reasonable compensation for furnishing necessary plan services (e.g., a prohibited transaction exemption applied).
For further information regarding ERISA fiduciary obligations and the selection of plan service providers, PPI clients can download a copy of our publication ERISA Fiduciary Governance: A Guide for Employers, from the Client Help Center.
Cunningham v. Cornell University