Plan Sponsors Beware: The U.S. Supreme Court Just Eased Requirements to File ERISA Prohibited Transaction Suits

Many sponsors and fiduciaries of ERISA retirement plans had been hoping that the U.S. Supreme Court’s opinion in Cunningham v. Cornell University (No. 23-1007) would articulate new pleading standards that would slow the recent onslaught of litigation against plans of all sizes. Unfortunately for those sponsors and fiduciaries, the Court said otherwise. In a unanimous decision published on April 17, 2025 and written by Justice Sotomayor, the Court held that at the pleading stage, plaintiffs seeking to state a prohibited transaction claim under ERISA Section 406(a)(1)(C) only have to allege the elements of the prohibited transaction—“no more, no less.” The plaintiffs do not bear the burden of pleading and proving that the exemptions in ERISA Section 408 do not apply; rather, plan sponsors/fiduciaries must invoke those exemptions as affirmative defenses.

The Court’s ruling in Cornell will likely trigger a new wave of lawsuits that target ERISA plans for essential and routine transactions with service providers. It also places greater pressure on sponsors (and their insurers) to seek to resolve these cases expeditiously with settlements, rather than incurring the time and expense of litigating.

Background and Court’s Holding

The case involves a class of Cornell employees who participated in the university’s two defined contribution plans from 2010 to 2016, who sued Cornell and other plan fiduciaries, alleging that they violated ERISA by causing the plans to engage in prohibited transactions for recordkeeping services with TIAA and Fidelity.¹ The plaintiffs alleged that as service providers, TIAA and Fidelity were parties in interest to the plans and that their provision of recordkeeping and administrative services to the plans constituted a prohibited transaction under ERISA, unless Cornell could show that it relied on an exemption. The plaintiffs also alleged that the plan fiduciaries allowed the plans to pay TIAA and Fidelity more than a reasonable recordkeeping fee. Cornell moved to dismiss the prohibited transaction claim, and the District Court from the Southern District of New York granted the university’s motion in 2017, ruling that in addition to pleading the prohibited transaction elements contained in ERISA Section 406(a)(1)(C), a plaintiff must also allege “some evidence of self-dealing or other disloyal conduct,” which the District Court said the plaintiffs failed to do here.

In 2023, the Second Circuit affirmed the District Court’s dismissal, but it did so on the basis that the exemptions to ERISA’s prohibited transactions impose additional pleading requirements. According to the Second Circuit, if a plaintiff alleges a prohibited transaction, he or she must also allege “that [the] transaction was unnecessary or involved unreasonable compensation.” The Second Circuit deviated from the Eighth Circuit, which had held in Braden v. Wal-Mart Stores, Inc., 588 F. 3d 585 (2009) that no additional pleading requirements beyond satisfying the elements of ERISA Section 406(a)(1) apply to prohibited transaction claims. As a result, the U.S. Supreme Court was asked to decide whether a plaintiff can state a claim for relief by simply alleging that a plan fiduciary engaged in a prohibited transaction, or whether they must plead allegations that disprove the applicability of an exemption.

In reaching its conclusion, the Court focused on the structural framework of ERISA and the drafters’ decision to separately enumerate the exemptions in Section 408. “[W]hen a statute has exemptions laid out apart from the prohibitions, and the exemptions expressly refer to the prohibited conduct as such, the exemptions ordinarily constitute ‘affirmative defense[s]’ that are ‘entirely the responsibility of the party raising’ them.” (internal citations omitted). The Court noted how a plaintiff can still lose the case on the merits; however, at the pleading stage, all that is necessary to survive a motion to dismiss is to assert how the elements of ERISA Section 406(a)(1)(C) have been satisfied.

Key Points from Cunningham v. Cornell

• Under Section 406 of ERISA, every payment that an ERISA-covered plan provides to a service provider is automatically a prohibited transaction.
• In order to pay service providers, such as recordkeepers, a plan would normally rely on Section 408 of ERISA, which states that a plan may pay a party in interest for services necessary to operate the plan, so long as such compensation is reasonable.
• Under Cornell, plaintiffs can bring a claim based solely on the fact that the plan is paying its service providers, despite the exemption for retirement plan recordkeeping, investment advisor and other standard plan-related service providers.

The Court also discussed how ERISA Section 406’s provisions were intended to be “per se prohibitions” and that requiring plaintiffs to plead and disprove all of the potentially applicable statutory exemptions (as well as the hundreds of administrative exemptions) would be impractical and “plainly frustrate Congress’s intent to create a ‘categorica[l] bar.’” From a policy standpoint, the Court was persuaded by the participants’ fairness argument that there is an information asymmetry where the fiduciaries—as opposed to the plaintiffs/participants prior to discovery—would have access to the facts underlying which exemption(s) was being invoked.

While the opinion expresses serious concerns about triggering “an avalanche of meritless litigation,” the Court also said that those concerns do not outweigh ERISA’s statutory text and structure. Furthermore, the Court explained how there are various tools available to judges to prevent this result, which include: (i) Fed. R. Civ. P. 7(a)(7) that authorizes a court to order plaintiffs to submit a reply with specific, nonconclusory factual allegations; (ii) Article III standing requirements, which would force a court to dismiss prohibited transaction suits that fail to identify a concrete injury to the participants; (iii) limited or expedited discovery for cases that survive a motion to dismiss; (iv) Rule 11 sanctions; and (v) discretion to award reasonable attorney’s fees to either party.

Practical Takeaways

The lower pleading standards articulated in Cornell leave plan sponsors and fiduciaries even more vulnerable now to litigation for engaging in routine, ordinary-course transactions with service providers. This will have a highly deleterious impact on plans.

These new standards empower plaintiffs’ firms to initiate “the equivalent of a litigation audit of any plan” (in the words of the amicus brief filed by Encore Fiduciary, a leading fiduciary liability insurance underwriter whose president has been nominated to be the next head of the U.S. Department of Labor’s Employee Benefits Security Administration). This risk even applies to plans with diligent and prudent fiduciary processes in place. Additionally, as Encore Fiduciary’s amicus brief explains, “if underwriters’ models cannot ‘readily divide the plausible sheep from the meritless goats at the pleading stage,’ insurers will have to significantly raise premiums, which could make it more difficult to procure sufficient insurance coverage as well as more difficult to convince qualified individuals to serve as plan fiduciaries because of the risk of personal liability.” Furthermore, given the significantly larger risk of ordinary-course transactions becoming the subject of a class action lawsuit (and expensive discovery), this will likely limit the selection of service providers and services, which is harmful to participants and beneficiaries.

The lower pleading standards will also likely result in inconsistent application among the courts, with the risk that certain judges will develop a reputation for being more receptive to these prohibited transaction claims and the plaintiffs’ firms that bring these cases. For a large plan sponsor with operations in most or all states, it will have few (if any) defenses for challenging this forum selection strategy.

As Justice Alito’s concurrence notes, it remains to be seen whether the mechanisms available to district court judges will adequately address the flood of ERISA cases that will likely emanate from this ruling. Plan fiduciaries may not be able to prevent the filing of these lawsuits; however, they should still maintain robust governance protocols and ensure that their actions are well deliberated and diligently documented. Moreover, they should be meticulous about satisfying all of the requirements of any prohibited transaction exemption they are seeking to rely on—both in terms of documentary and operational compliance.

Cornell also reinforces the importance of adopting other best practices such as:

• Regularly reviewing service providers’ agreements/policies and ensuring that the terms of the agreements are transparent (e.g., any 12b-1 or other investment revenue sharing with the recordkeeper) and in line with market norms/practices;
• Periodically issuing requests for proposals for service providers, and eliciting information on and assessing the qualifications of the provider, the scope of the services to be provided and whether fees being charged are appropriate/ market-competitive;
• Working with a liability insurance broker to review or obtain ERISA fiduciary insurance coverage for all benefit plans subject to ERISA, with appropriate terms and conditions such as adequate coverage relative to the size of the plans and the ability to engage litigation counsel of the sponsor’s choice;
• Ensuring that any questionnaires or forms from the fiduciary insurance providers are completed properly and accurately—in consultation with counsel—to ensure that coverage is adequate and to avoid disclosing unnecessary information;
• Establishing a regularly documented cadence of check-ins with service providers to ensure that they are adequately fulfilling any administrative tasks delegated to them, and documenting these service provider reviews.

If you would like to discuss the impact that the Supreme Court’s decision in this case may have on any aspect of your business, please reach out to any of the below authors or your regular Ropes & Gray advisor.