The Supreme Court recently granted certiorari in Cunningham v. Cornell University to address the pleading standard for prohibited transactions under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1106(a)(1)(C).
Section 1106(a) generally bars fiduciaries from causing a plan to engage in transactions involving “a party in interest,” subject to an enumerated list of exceptions in Section 1108. 29 U.S.C. § 1106(a)(1)(C). ERISA defines a “party in interest” of an employee-benefit plan to include “a person providing services to such plan.” 29 U.S.C. § 1002(14)(B). Putting these provisions together, if they are read literally, ERISA may be read to prohibit payments by a plan to any entity providing it with any services, unless the transaction satisfies one of Section 1108’s exceptions, such as the exception for services “necessary” to the plan for which “reasonable compensation” is paid, 29 U.S.C. § 1108(b)(2)(A).
In Cunningham, the plaintiffs alleged that Cornell University violated Section 1106(a) by causing its plans to engage in transactions with two investment providers that also served as the plans’ recordkeepers: Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (“TIAA”) and Fidelity Investments, Inc. Both TIAA and Fidelity received recordkeeping fees through a revenue sharing model. 86 F.4th 961 (2d Cir. 2023).
In a unanimous opinion authored by Chief Judge Livingston, the Second Circuit affirmed the dismissal of the plaintiffs’ claim. The court first noted a circuit split on the interpretation of Section 1106(a)—the Third, Seventh, and Tenth Circuits have declined to read Section 1106(a) literally because doing so would prohibit fiduciaries from paying third parties to perform essential services in support of a plan. In contrast, the Eighth and Ninth Circuits have adopted a literal reading of Section 1106(a), and the Eighth Circuit permitted plaintiffs to proceed...
