Table of Contents
Introduction
A major current focus of litigation brought under the Employee Retirement Income Security Act of 1974 (ERISA) [1] has to do with excessive fees charged to participants in their employers’ 401(k) [2] and 403(b) defined contribution plans. [3] The plaintiffs’ claims in such cases are that excessive charges erode plan participants’ retirement savings and that employers are not fulfilling their fiduciary obligation under ERISA [4] to ensure that the plans are administered in the most cost-efficient manner.
The Supreme Court has issued a series of rulings clarifying the application of those fiduciary duties to the operations of the plans. [5] Initially, in Tibble v. Edison International, the Supreme Court ruled that plan fiduciaries have an ongoing duty to monitor investment alternatives to weed out non-performing investments and those which have excessive fee charges in relation to similar types of funds. Then, in Hughes v. Northwestern University, the Court made it clear that offering less expensive investment options is not a defense to offering investment options to plan participants that have excessive charges in relation to comparable funds. But what remained to be decided were the pleading standards that plaintiffs needed to meet for a claim to survive a motion to dismiss. The Supreme Court resolved that issue in its most recently concluded term in Cunningham v. Cornell University. [6] Cunningham relaxed prior pleading standards, making it easier for plaintiffs to pursue claims involving excessive fee charges.
Summary of the Case
The Cunningham case was brought as a class action lawsuit. The case involved two defined contribution plans sponsored and administered by Cornell University which contracted with TIAA (Teachers Insurance and Annuity Association) and Fidelity to provide recordkeeping services and other administrative services for the plans. The plaintiffs maintained that TIAA and Fidelity were “parties-in-interest,” [7] and that they had committed prohibited transactions [8] by paying the plans’ recordkeepers excessive compensation.
The district court dismissed the claim, and the Second Circuit affirmed the dismissal finding the plaintiffs failed to adequately plead claims alleging a violation of 29 U.S.C. § 1106(a)(1)(C) and by not pleading facts that negated the applicability of §1108(b)(2)(A), which provides an exemption from a prohibited transaction claim for “[c] ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”
The Supreme Court unanimously reversed the lower courts in an opinion authored by Justice Sonia Sotomayor which concluded that a complaint alleging the commission of prohibited transactions under §1106(a)(1)(C) need only plausibly allege:
1. The fiduciary caused the plan to engage in a transaction;
2. The fiduciary knew or should have known it involved furnishing goods, services, or facilities;
3. The transaction was with a party in interest. Hence, the Court held “that plaintiffs seeking to state a § 1106(a)(1)(C) claim must plausibly allege that a plan fiduciary engaged in a transaction proscribed therein, no more, no less. Plaintiffs are not required to plead and prove that the myriad § 1108 exemptions pose no barrier to ultimate relief.” [9]
Discussion
The Cunningham case turned on a basic issue of civil procedure – does a plaintiff need allege in a complaint not only the elements of a claim but must also allege with factual specificity that no affirmative defenses apply? The answer is clearly no, since Federal Rule of Civil Procedure 8(c) provides that affirmative defenses are to be raised by the defendant in response to a pleading.
The Supreme Court explained that ERISA’s prohibited transaction rules supplement ERISA’s “general duty of loyalty to the plan’s beneficiaries … by categorically barring certain transactions deemed ‘likely to injury the pension plan.” [10] What may appear to be a prohibited transaction, though, can be overcome by a showing that the act complained of falls within one of the 21 exemptions to prohibited transactions enumerated in 29 U.S.C. § 1108.
In the suit brought against Cornell, the plaintiffs maintained that they charged excessive fees for recordkeeping and administrative services. In one plan, the fees ranged from $115 to $183 per year per plan participant, and in the other, participants were each charged $145 to $200, even though plaintiffs maintained a reasonable fee was $35 per year per participant.
The district court dismissed the complaint, finding the plaintiffs not only needed to allege a prohibited transaction, but also needed to allege evidence of self-dealing or disloyal conduct. The Second Circuit affirmed, but on a different ground, finding that if merely alleging a prohibited transaction was sufficient, such a finding could prohibit plans from “paying third parties to perform essential services to a plan.” [11] Hence, the Second Circuit held the prohibited transaction exceptions imposed additional pleading requirements, because the § 1108 exemptions are not purely affirmative defenses but are incorporated into the § 1106 prohibitions. Accordingly, the appellate court ruled that the inapplicability of the exemptions must be affirmatively pled with facts showing that the transaction was unnecessary or imposed unreasonable compensation. [12] The Eighth Circuit held to the contrary, however, in Braden v. Wal-Mart Stores, Inc., [13] thus creating a Circuit split.
In resolving the circuit split by overruling the Second Circuit, the Supreme Court explained that there is no language in § 1108 imposing additional pleading requirements, and in similar contexts, statutory exemptions to prohibited conduct are viewed as affirmative defenses that must be pled by the defendant. [14] Thus, the Court determined plaintiffs needed only to plausibly allege the elements of a prohibited transaction, although it pointed out that if the defendant pleads and proves the applicability of an exemption, the plaintiffs’ claim fails.
The Court added that “because §1106(a), by its terms, sets out per se prohibitions, it would make little sense to put the onus on plaintiffs to plead and disprove any potentially relevant separate §1108 exemptions. [15] The Supreme Court further observed that it would be “especially illogical” to require plaintiffs to plead the inapplicability of exemptions when the facts supporting applicable objections would be in the fiduciary’s possession. [16]
The Court’s opinion also addressed Cornell’s concern that relieving plaintiffs from disproving exemptions would lead to “an avalanche of meritless litigation.” [17] While acknowledging those concerns, the Supreme Court noted that defendants could plead their affirmative defenses and then invoke Federal Rule of Civil Procedure 7 to request the district court to require a reply by plaintiffs based on specific non-conclusory facts. [18] If the plaintiffs were unable to do so, the complaint would be dismissed. The Court also suggested that plaintiffs would lack Article III standing if they were unable to allege they suffered a concrete injury.[19] Further, if an exemption was obviously applicable, plaintiffs bringing prohibited transaction claims would likely face sanctions under Rule 11 of the Federal Rules of Civil Procedure.
A concurring opinion authored by Justice Alito and joined in by Justices Thomas and Kavanaugh, joined in the holding, but expressed concerns about frivolous litigation and the costs that would be imposed on plan sponsors and parties-in-interest if the cases were to proceed beyond the motion to dismiss stage due to the costs of discovery, which would ultimately be passed on to the plan participants.
The Consequences of the Cunningham Ruling
This ruling was obviously a huge win for plan participants who have seen their retirement benefits shrink due to excessive fees charged to their accounts. But the ruling is somewhat puzzling, since to state a plausible claim sufficient to survive a motion to dismiss, it would seem plaintiffs would still need to do more than merely assert a prohibited transaction. In addition, to overcome a standing challenge, plaintiffs would also need to allege concrete injuries. So it is hard to see how this ruling changes much. Nor does this ruling appear poised to trigger an avalanche of new cases, especially in view of the suggestions made in Justice Sotomayor’s opinion for the Court on how to weed out frivolous lawsuits.
On the other hand, the Cunningham ruling may make it more difficult for retirement plan sponsors and parties-in interest to dismiss cases at the outset of the litigation and may subject those parties to costly discovery. However, such costs could be significantly mitigated if district courts strictly supervise discovery, and initially permit only targeted discovery aimed at ascertaining the reasonableness of service fees charged.
Just as an earlier wave of litigation led to “best practices” for fiduciaries with respect to selection and monitoring of investment options, the ruling in Cunningham suggests steps that fiduciaries can take to avoid costly litigation (and which they probably should have already been doing anyway). For example, when plan sponsors contract with service providers, they should do so through a competitive process which is transparent and fully documented, so they can better show the reasonableness of the fees being paid. Plan sponsors should also regularly benchmark the fees they are paying to ensure that those fees are reasonable and no more costly than they need to be. The disparity between what the plan participants on the Cornell plans were charged and what the plaintiffs alleged they should have been paying was vast. That alone suggests unreasonableness on its face if plaintiffs are able to plead facts establishing that significantly lower fees could have been negotiated. However, the Supreme Court ruled only on the pleading standard and did not address the merits of the claim.
In the wake of Cunningham, plan sponsors should aggressively plead § 1108 prohibited transaction exemptions as affirmative defenses and seek a court order requiring that plaintiffs file a reply. Another mechanism that could be used which was not mentioned in the Cunningham decision is a motion for a more definite statement filed under Federal Rule of Civil Procedure 12(e) seeking detailed facts in support of prohibited transaction allegations.
The bottom line, though is that this ruling is both in accordance with the simplified pleading standards set forth in Federal Rule of Civil Procedure 8 and is more in accordance with ERISA’s protective purposes set forth in the statute’s preamble.[20] It should also be kept in mind that the fiduciary duties set forth in the ERISA statute [21] are process oriented, not outcome driven. Thus, just because administrative and recordkeeping fees may seem high does not mean they are unreasonable if the plan sponsor exercised prudence and diligence in the selection of a service provider and the fees charged to participants were regularly monitored.
Cunningham is merely an extension of the Supreme Court’s prior rulings in Tibble v. Edison and Hughes v. Northwestern University that have established a consistent theme of protecting participants in employer-sponsored defined contribution plans such as 401(k) and 403(b) plans. While those cases focused on the investments themselves, Cunningham addressed the administrative and recordkeeping expenses faced by plan participants that were diminishing their retirement savings.
Conclusion
In Cunningham, the Supreme Court has extended its oversight over fiduciary conduct and made plan fiduciaries and parties-in-interest more accountable when they fail to exercise fiduciary prudence and diligence in their management of their employees’ retirement savings. The message from the Supreme Court is clear – that managers of retirement plans cannot manage their plans passively but must exercise constant vigilance over all aspects of the plan to prevent employees from being subjected to non-performing investments or other unreasonable charges. When prudence and diligence are lacking and financial losses result, plan participants need to be able to redress those harms through court proceedings. Hence, the Supreme Court’s trilogy of cases – Edison, Hughes, and Cunningham – stand for the proposition that retirement plan management requires constant vigilance not just as a matter of good practice, but as a fiduciary standard of care which, if violated, will result in liability. By removing a procedural hurdle that blocked claimants from access to judicial redress, the Supreme Court in Cunningham fulfilled Congress’s intent of assuring participants in employee benefit plans and their beneficiaries “ready access to the Federal courts.”
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Bender’s Labor & Employment Bulletin on September 2025.
[1] 29 U.S.C. § 1001 et seq.
[2] 26 U.S.C. § 401(k).
[3] 26 U.S.C § 403(b) (providing for defined contribution plans for non-profit organizations).
[4] 29 U.S.C. § 1104(a)(1) sets forth ERISA’s principal duties that plan fiduciaries owe participants in employee benefit plans and their beneficiaries: a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.
[5] See, e.g., Tibble v. Edison Intl., 575 U.S. 523 (2015) (establishing duty to monitor funds for cost and performance); Hughes v. Northwestern University, 142 S.Ct. 737 (2022) (finding that offering lower cost investment options did not fully remediate fiduciary breaches).
[6] Cunningham v. Cornell University, 145 S.Ct. 1020
[7] A “party-in-interest” is defined by the ERISA statute at 29 U.S.C. § 1002(14) to mean with respect to an employee benefit plan:
(A) any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan; (B) a person providing services to such plan; (C) an employer any of whose employees are covered by such plan; (D) an employee organization any of whose members are covered by such plan; (E) an owner, direct or indirect, of 50 percent or more of— (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation. (ii) the capital interest or the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); (F) a relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or (E); (G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of— (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E); (H) an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G), or of the employee benefit plan; or (I) a 10 percent or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subparagraph (B), (C), (D), (E), or (G). The Secretary, after consultation and coordination with the Secretary of the Treasury, may by regulation prescribe a percentage lower than 50 percent for subparagraph (E) and (G) and lower than 10 percent for subparagraph (H) or (I). The Secretary may prescribe regulations for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stockholdings are taken into account. Any person who is a party in interest with respect to a plan to which a trust described in section 501(c)(22) of title 26 is permitted to make payments under section 1403 of this title shall be treated as a party in interest with respect to such trust.
[8] 29 U.S.C. § 1106 states in relevant part:
(a)Transactions between plan and party in interest. Except as provided in section 1108 of this title:
(1)A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect—
(A) sale or exchange, or leasing, of any property between the plan and a party in interest;
(B) lending of money or other extension of credit between the plan and a party in interest;
(C) furnishing of goods, services, or facilities between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or
(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title.
[9] 145 S.Ct. at 1032.
[10] 145 S.Ct. at 1025 (citing Harris Trust and Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 241-242, 120 S.Ct. 2180, 147 L.Ed.2d 187 (2000)).
[11] Cunningham v. Cornell University, 86 F.4th 961, 973 (2d Cir. 2023).
[12] 86 F.4th at 975.
[13] Braden v. Wal-Mart Stores, Inc., 588 F. 3d 585, 600-602 (8th Cir. 2009).
[14] The Court cited Meacham v. Knolls Atomic Power Laboratory, 554 U.S. 84, 128 S.Ct. 2395, 171 L.Ed.2d 283 (2008), which involved the Age Discrimination in Employment Act’s exemptions to discriminatory conduct set forth in 29 U.S.C. 623(f), where the Court held that defendants faced the burden of pleading an exemption and then proving its applicability by a preponderance of the evidence.
[15] 145 S.Ct. at 1030.
[16] 145 S.Ct. at 1030.
[17] 145 S.Ct. at 1031.
[18] 145 S.Ct. at 1032.
[19] 145 S.Ct. at 1032.
[20] ERISA’s intent is set forth in 29 U.S.C. § 1001(b), which states:
It is hereby declared to be the policy of this chapter to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
[21] See n. 4, supra., quoting 29 U.S.C. § 1104(a)(1) (B), which requires fiduciaries to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
