On April 17, 2025, the Supreme Court issued its opinion in Cunningham v. Cornell University, No. 23-1007, 604 U.S. ___ (2025), a case addressing the pleading standard for prohibited-transaction claims under § 406(a) of the Employee Retirement Income Security Act of 1974 (ERISA). Section 406(a) proscribes certain transactions between plans and “parties in interest” absent a statutory exemption enumerated under ERISA § 408. The core question on appeal was whether plaintiffs must allege, as an element of a prohibited-transaction claim under § 406(a), that an exemption under § 408 does not render the challenged transaction lawful.
In a decision that is expected to have wide-ranging implications, the Court held that exemptions under § 408 provide affirmative defenses to liability under § 406(a). Consequently, plaintiffs need not allege that any of the exemptions set forth in § 408 are unavailable to state a plausible claim for relief. Rather, the burden falls on plan fiduciary defendants to plead and prove that an exemption under § 408 nullifies a plaintiff’s claim.
The Court recognized that its decision in Cunningham could make it more difficult for defendants to secure the dismissal of prohibited-transaction claims by invoking a statutory exemption. If so, plan sponsors (and other fiduciaries) could be forced to engage in costly discovery defending transactions that ERISA expressly permits, effectively penalizing them for providing valuable and necessary services to participants.
Provided below is a more detailed discussion of Cunningham, divided into three parts. The first part briefly discusses the legal framework governing prohibited-transaction claims. The second part summarizes the Court’s analysis. The third part concludes with an overview of potential mitigation strategies.
Legal Framework
Acting as a “supplement[]” to the fiduciary duty of loyalty, § 406(a) “categorically bar[s] certain transactions” between an employee benefit plan and a party in interest. See Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241–42 (2000) (citing Comm’r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160 (1993)).[1] ERISA refers to transactions triggering this statutory bar as “prohibited transactions.”
Read in isolation, the ban on prohibited transactions under § 406(a) would make it nearly impossible for plans to function: Plan administrators generally would be unable to hire third parties, like recordkeepers, to provide necessary services. See ERISA § 3(14)(B) (defining “party in interest” to include “a person providing services to [a] plan”). Without those arrangements, modern employee benefit plans would be unable to provide essential services to participants, like daily valuations for participant-directed accounts under § 401(k) plans and other defined contribution plans.
Section 408 seeks to avoid this untenable result by authorizing various types of transactions between plans and parties-in-interest, including “[c]ontracting or making reasonable arrangements with a party in interest for office space, legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.” Id. § 408(b)(2)(A). Vast swaths of ordinary and necessary arrangements between plans and service providers rely on this exemption to avoid the blanket ban on third-party service providers under § 406(a).
The Court’s Decision
The plaintiffs in Cunningham were Cornell University employees who participated in defined contribution plans sponsored by the university. The plans hired two vendors to provide recordkeeping and investment services for their respective platforms of funds. In exchange, the vendors charged the plans fees based on a percentage of plan assets.
The plaintiffs brought several claims challenging these arrangements, including a prohibited-transaction claim alleging that the defendants violated § 406(a) by causing the plans to pay excessive fees to service providers. At the motion-to-dismiss stage, the district court held that the plaintiffs failed to state a plausible claim for relief because they did not allege “evidence of self-dealing or other disloyal conduct” by the defendants. See Cunningham v. Cornell Univ., No. 16-cv-6525, 2017 WL 4358769, at *10 (S.D.N.Y. Sept. 29, 2017), aff’d 86 F.4th 961 (2d Cir. 2023), rev’d and remanded, 604 U.S. ___ (2025).
The Second Circuit affirmed but supplied a...
