At a Glance
- The Supreme Court eased the requirements for bringing a prohibited transaction claim under ERISA.
- This decision has direct consequences for employers that sponsor ERISA plans as well as for the fiduciaries that administer and manage those plans.
- Employers should consider directly covering recordkeeping costs, maintain thorough documentation, and update fiduciary processes to strengthen defenses against prohibited transaction claims.
On April 17, 2025, the U.S. Supreme Court issued a decision that dealt a blow to benefit plan fiduciaries nationwide. The Court unanimously held in Cunningham v. Cornell University1 that a plaintiff asserting that a plan and service provider engaged in a prohibited transaction under the Employee Retirement Income Security Act (ERISA) is not required to plead facts negating the applicability of the prohibited transaction exemptions listed in another section of ERISA. Essentially, in response to the question of whether, to state a claim under 29 U.S.C. '1106, a plaintiff must plead that an ERISA prohibited transaction exemption does not apply to an alleged transaction between a plan and a service provider, the Court answered "no." Thus, as the Court stated, "[a]t the pleading stage [] it suffices for a plaintiff plausibly to allege the three elements set forth in '1106(a)(1)(C)" - (1) that a plan engaged in a transaction, (2) involving the furnishing of goods, services, or facilities, (3) with a party in interest, which includes service providers. And the defendant fiduciaries therefore bear the burden of proving that an exemption applies to the alleged prohibited transaction.
With this decision, the Court resolved a circuit split and reversed the Second Circuit's previous decision dismissing the plaintiff's prohibited transaction claim. The Second Circuit had held that, to survive a motion to dismiss on a prohibited transaction claim, the plaintiffs must plead that the service provider arrangement was either unnecessary or involved more than reasonable compensation. In other words, the Second Circuit required the plaintiffs to include the prohibited transaction exemptions in their pleadings. Prior to this decision, other circuits including the Eighth and Ninth Circuits, had not imposed those pleading requirements, while the Seventh Circuit required the plaintiffs to allege the additional elements to state a claim because a "literal reading" of 29 U.S.C. ' 1106(a)(1)(C) would purportedly produce "results that are inconsistent with ERISA's statutory purpose."2
The implications of this decision, as Justice Alito discusses in his concurrence, is to prolong litigation because prohibited transaction claims may more readily survive a motion to dismiss. Consequently, litigation exposure and defense costs will increase, even where fiduciaries acted prudently and in compliance with ERISA.
ERISA's Prohibited Transaction and Exemption Provisions
The key sections of ERISA at issue in Cunningham are 29 U.S.C. sections 1106(a)(1)(C) and 1108(b)(2). Section 1106(a)(1)(C) prohibits fiduciaries from causing a plan to enter into transactions involving the furnishing of goods or services with a "party in interest"'a category that includes most plan service providers'and section 1108(b)(2), which sets forth a list of 21 exemptions for prohibited transactions. Pertinent here is the exemption for necessary services if no more than reasonable compensation is paid. Specifically, section 1108(b)(2)(A) provides that the prohibitions listed in section 1106 do not apply to "reasonable arrangements with a party in interest for . . . legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor."
Second Circuit's Decision
Cornell offers 403(b) retirement plans to eligible employees. These plans are similar to 401(k) plans, but they apply to tax-exempt entities. Cornell, as the named administrator of the Cornell University Retirement Plan for Employees of the Endowed Colleges at Ithaca and the Cornell University Tax Deferred Annuity Plan (collectively, the "Plans"), retained Teachers Insurance and Annuity Association of America-College Retirement Equities Fund ("TIAA") and Fidelity Investments, Inc. ("Fidelity") to provide the Plans with investment products and recordkeeping services. Fidelity and TIAA were compensated with fees from the Plans' assets. Participants in the Plans alleged that the Plans' fiduciaries breached their fiduciary duties and that the payments made to the Plan's recordkeepers constituted prohibited transactions under 29 U.S.C. '1106(a)(1)(C).
In November 2023, the Second Circuit held that in order for the plaintiffs to survive dismissal of their prohibited transaction claim, they must affirmatively allege, along with the prohibited transaction elements contained with section 1106(a)(1)(C), that the arrangement was either unnecessary or involved more than reasonable compensation.3 As the Second Circuit reasoned, the exemptions in section 1108 are not "merely [] affirmative defenses to the conduct proscribed in '1106(a)"...
