By: Shannon Kelly and Julie Zolty
April 30, 2025
In 29 U.S.C. § 1106, the Employee Retirement Income Security Act of 1974 (ERISA) prohibits plan fiduciaries from engaging in certain transactions with parties in interest unless a permitted exception outlined in §1108 applies. §1108 permits a plan to contract or make reasonable arrangements with a party for services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid.
In recent years, there has been a growing number of class action claims brought by retirement and health plan participants alleging that plans are paying excessive fees to service providers to manage plans for employers. More specifically, in Cunningham v. Cornell University, a putative class of current and former university employees brought a prohibited transaction claim alleging that the University and its fiduciaries entered into arrangements with service providers for its retirement plans that resulted in the payment of excessive fees and therefore violated ERISA’s fiduciary duty of prudence. The District Court dismissed the case on a motion to dismiss, and the Second Circuit affirmed, for failure to plead that the transaction was “unnecessary or involved unreasonable compensation” under § 1108.
In a unanimous decision last week, the U.S. Supreme Court handed down its ruling in Cunningham v. Cornell University, which defined the pleading standard in ERISA class action prohibited transaction claims under § 1106(a). The question the Court decided was whether plaintiffs have to allege the fee paid to plan service providers is unreasonable, whether the exemption under §1108 does not apply as part of their claim, or whether defendants have to assert that the fees are reasonable in their affirmative defenses. To state a claim under § 1106, the plaintiff needs to allege three elements, (1) a listed transaction, typically between the plan and a “party in interest” (e.g., a service provider, participant, or fiduciary); (2) that a plan fiduciary causes the plan to engage in; and (3) is one that the fiduciary knows or should know constitutes a direct or indirect listed transaction. Accordingly, the Court held the exemptions in § 1108 were not part of the elements of a § 1106 claim and do not impose additional pleading requirements for § 1106 claims.
In doing so, the Court placed the burden on the defendants to prove the exemption as an affirmative defense. The effect of the Court’s holding lowers the pleading standard for plaintiffs, thereby making it more difficult for defendants to dispose of a claim at the motion to dismiss stage.
In light of this ruling, the main takeaway for employers and plan administrators? Shore up fiduciary processes, including arrangements with service providers, and review them regularly.
Questions?
Contact GrayRobinson Shareholder Shannon Kelly or a member of the Labor and Employment practice.