Supreme Court Ruling: ERISA Implications for Plan Fiduciaries
In a recent unanimous decision, the US Supreme Court made a clear delineation as to who bears the burden of proof in ERISA litigation. The case, involving Cornell University’s 403(b) retirement plan, has implications for thousands of ERISA-covered retirement plans. The decision clarifies the pleading standard required for plaintiffs to move forward with allegations of fiduciary breaches and could significantly increase the litigation burden on plan sponsors, especially at the early stages of a lawsuit.
The Supreme Court’s recent decision in Cunningham v. Cornell University addresses a critical question in ERISA litigation: how much a plaintiff must demonstrate to move a suit alleging a breach of fiduciary duty to trial.
Background
The lawsuit was filed on behalf of some 28,000 current and former plan participants of Cornell University’s 403(b) plan. The plaintiffs alleged that the plan fiduciaries allowed excessive fees, failed to adequately monitor service providers, and engaged in transactions that benefited third parties at the expense of participants.
A key question in the case was what level of proof is required in a plaintiff’s initial complaint to survive a motion to dismiss under ERISA’s rules. In a unanimous decision, the Court reversed the decision of the Second Circuit (which had granted the Cornell defendants’ motion to dismiss the suit) and remanded it “for further proceedings consistent with this opinion.” This means that plaintiffs only need to allege that a prohibited transaction occurred and that an injury resulted from that transaction to proceed past a motion to dismiss and move to discovery and trial. This sets a lower bar for lawsuits to proceed, shifting the burden of asserting and proving any legal exemptions to a fiduciary breach claim to the defendant fiduciary, rather than the plaintiff. In other words, it is now up to the defendant to show that one of the exceptions applies to what would otherwise be a prohibited transaction. Still, as the Court pointed out, the plaintiff does not automatically prevail simply by alleging that the basic elements of the violation are there. If the defendant can show that the transaction met an exception, for example, by showing that a service was necessary for the operation of the plan and that the fee paid for this service was reasonable, then the defendant won’t be held responsible for causing the plan harm. The burden of asserting and proving any applicable prohibited transaction exemptions now clearly rests with the defendant. This decision lowers the barrier for ERISA lawsuits to proceed to discovery and trial, increasing litigation exposure for plan fiduciaries. By allowing more cases to move forward past the pleading phase, this decision will likely lead to an increase in fiduciary breach lawsuits. Defending lawsuits, even if ultimately successful, is costly and time-consuming due to the demands of discovery and preparation for trial.
Recommended Actions for Fiduciaries
The ruling highlights the need for proactive fiduciary oversight. The ability to successfully assert an exemption, such as proving that a transaction or ongoing arrangement involved necessary services and that the associated costs were reasonable, will now likely be tested in litigation, and not at the motion to dismiss phase. This places greater emphasis on maintaining detailed records and demonstrating a well-reasoned decision-making process.
• Service provider relationships: Ensure service agreements clearly document fee arrangements and the rationale for selecting each vendor.
• Monitor plan fees and performance: Compare your plan’s cost structure against industry benchmarks and ensure value to participants.
• Conduct fiduciary training: Ensure committee members are aware of evolving legal expectations and fiduciary duties.
• Review litigation readiness: Work with ERISA counsel and unbiased Third-Party Evaluators to assess your plan’s exposure and ensure exemption criteria can be clearly demonstrated if challenged.
• Conduct a mock Prohibited Transaction Exemption (PTE) audit to ensure all fiduciary and parties of interest arrangements pass ERISA § 408(b)&(c) PTE criteria.
Conclusion
The Supreme Court’s decision lowers the barrier for ERISA lawsuits to proceed to discovery and trial, increasing litigation exposure for plan fiduciaries. The ruling clarifies that plaintiffs need only allege a prohibited transaction, without disproving possible exemptions, to move a case forward. The burden of asserting and proving any applicable exemptions now clearly rests with the defendant.
For plan sponsors and service providers alike, this means a higher potential for litigation and greater emphasis on maintaining fiduciary best practices. If unaddressed by Congress or the regulators, increased litigation will not just lead to more exposure, but it will likely lead to higher liability insurance premiums and eventually increased plan costs and fees (ultimately hurting participants). While this condition persists, plan fiduciaries should take this as a cue to strengthen internal processes and ensure their decision-making and oversight practices are well-documented and legally sound. In today’s environment of increasing legal scrutiny, preparation and prudence are the best defense.
Spring 2025 Fiduciary Commentary
Supreme Court Ruling: ERISA Implications for Plan Fiduciaries
In a recent unanimous decision, the US Supreme Court made a clear delineation as to who bears the burden of proof in ERISA litigation. The case, involving Cornell University’s 403(b) retirement plan, has implications for thousands of ERISA-covered retirement plans. The decision clarifies the pleading standard required for plaintiffs to move forward with allegations of fiduciary breaches and could significantly increase the litigation burden on plan sponsors, especially at the early stages of a lawsuit.
The Supreme Court’s recent decision in Cunningham v. Cornell University addresses a critical question in ERISA litigation: how much a plaintiff must demonstrate to move a suit alleging a breach of fiduciary duty to trial.
Background
The lawsuit was filed on behalf of some 28,000 current and former plan participants of Cornell University’s 403(b) plan. The plaintiffs alleged that the plan fiduciaries allowed excessive fees, failed to adequately monitor service providers, and engaged in transactions that benefited third parties at the expense of participants.
A key question in the case was what level of proof is required in a plaintiff’s initial complaint to survive a motion to dismiss under ERISA’s rules. In a unanimous decision, the Court reversed the decision of the Second Circuit (which had granted the Cornell defendants’ motion to dismiss the suit) and remanded it “for further proceedings consistent with this opinion.” This means that plaintiffs only need to allege that a prohibited transaction occurred and that an injury resulted from that transaction to proceed past a motion to dismiss and move to discovery and trial. This sets a lower bar for lawsuits to proceed, shifting the burden of asserting and proving any legal exemptions to a fiduciary breach claim to the defendant fiduciary, rather than the plaintiff. In other words, it is now up to the defendant to show that one of the exceptions applies to what would otherwise be a prohibited transaction. Still, as the Court pointed out, the plaintiff does not automatically prevail simply by alleging that the basic elements of the violation are there. If the defendant can show that the transaction met an exception, for example, by showing that a service was necessary for the operation of the plan and that the fee paid for this service was reasonable, then the defendant won’t be held responsible for causing the plan harm. The burden of asserting and proving any applicable prohibited transaction exemptions now clearly rests with the defendant. This decision lowers the barrier for ERISA lawsuits to proceed to discovery and trial, increasing litigation exposure for plan fiduciaries. By allowing more cases to move forward past the pleading phase, this decision will likely lead to an increase in fiduciary breach lawsuits. Defending lawsuits, even if ultimately successful, is costly and time-consuming due to the demands of discovery and preparation for trial.
Recommended Actions for Fiduciaries
The ruling highlights the need for proactive fiduciary oversight. The ability to successfully assert an exemption, such as proving that a transaction or ongoing arrangement involved necessary services and that the associated costs were reasonable, will now likely be tested in litigation, and not at the motion to dismiss phase. This places greater emphasis on maintaining detailed records and demonstrating a well-reasoned decision-making process.
• Service provider relationships: Ensure service agreements clearly document fee arrangements and the rationale for selecting each vendor.
• Document fiduciary decisions: Maintain formal meeting minutes, investment committee reviews, and fee benchmarking data.
• Monitor plan fees and performance: Compare your plan’s cost structure against industry benchmarks and ensure value to participants.
• Conduct fiduciary training: Ensure committee members are aware of evolving legal expectations and fiduciary duties.
• Review litigation readiness: Work with ERISA counsel and unbiased Third-Party Evaluators to assess your plan’s exposure and ensure exemption criteria can be clearly demonstrated if challenged.
• Conduct a mock Prohibited Transaction Exemption (PTE) audit to ensure all fiduciary and parties of interest arrangements pass ERISA § 408(b)&(c) PTE criteria.
Conclusion
The Supreme Court’s decision lowers the barrier for ERISA lawsuits to proceed to discovery and trial, increasing litigation exposure for plan fiduciaries. The ruling clarifies that plaintiffs need only allege a prohibited transaction, without disproving possible exemptions, to move a case forward. The burden of asserting and proving any applicable exemptions now clearly rests with the defendant.
For plan sponsors and service providers alike, this means a higher potential for litigation and greater emphasis on maintaining fiduciary best practices. If unaddressed by Congress or the regulators, increased litigation will not just lead to more exposure, but it will likely lead to higher liability insurance premiums and eventually increased plan costs and fees (ultimately hurting participants). While this condition persists, plan fiduciaries should take this as a cue to strengthen internal processes and ensure their decision-making and oversight practices are well-documented and legally sound. In today’s environment of increasing legal scrutiny, preparation and prudence are the best defense.
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