However, on April 17, 2025, the Supreme Court decided in favor of the plaintiffs. The unanimous decision, authored by Justice Sonia Sotomayor, has significant implications for the plan sponsor community and the broader context of excessive fee lawsuits.

Background and Legal Context

The class action against Cornell University, brought on behalf of participants in its two 403(b) plans originally included a number of allegations that Cornell breached its ERISA fiduciary duties to the plans. The Supreme Court’s recent review concerned the specific allegation that Cornell engaged in “prohibited transitions” under ERISA Section 406(a)(1)(C), which states that a plan fiduciary may not engage in a transaction which constitutes “a furnishing of goods, services, or facilities between the plan and a party in interest.” Parties in interest typically include entities with a close relationship to the plan, including, but not limited to the sponsoring employer and third-party service providers. The transactions listed under ERISA section 406(a)(1) between a retirement plan and a “party in interest” are prohibited due to the potential for harm to plan participants arising from conflicts of interest. Plaintiffs alleged Cornell University, in its fiduciary capacity, hired two different firms to provide investments and recordkeeping services for Cornell’s two 403(b) Plans in violation of ERISA section 406(a)(1)(C).

Despite the protective nature of the prohibited transaction rules, ERISA recognizes that some transactions are necessary for the ongoing operation and maintenance of a plan. As a result, ERISA includes certain conditions which, if satisfied, will exempt an otherwise prohibited transaction from ERISA’s prohibitions. ERISA section 408 details the various statutory exemption requirements. Specifically, the ERISA section 408(b)(2) exemption permits certain transactions related to services or office space if they are necessary for the plan’s operation, the contract is reasonable, and the fees are deemed reasonable by plan fiduciaries after review of applicable service provider fee disclosures.

The plaintiffs alleged that Cornell engaged in prohibited transactions simply by entering into the respective service agreements and without addressing whether Cornell failed to satisfy the conditions for a prohibited transaction exemption under ERISA section 408(b)(2). Previously, the Second Circuit Court of Appeals had ruled in favor of Cornell, requiring plaintiffs to plausibly allege that the University failed to meet the conditions of the 408(b)(2) exemption in order to survive a motion to dismiss.

Supreme Court's Ruling and Its Implications

The Supreme Court’s decision reversed the Second Circuit’s ruling, holding that plaintiffs need only allege the elements of the prohibited transaction itself, without addressing potential exemptions, to proceed with their claims. This interpretation aligns with the “black letter law” principle that affirmative defenses like the 408(b)(2) exemption, must be asserted by the party seeking to rely on them, placing the burden of proof on the plan sponsor.

Justice Sotomayor’s opinion emphasized that the decision was based on established legal principles, requiring plan sponsors to prove compliance with exemptions rather than plaintiffs having to disprove them. This shift may increase the volume of ERISA class action lawsuits, as it lowers the threshold for plaintiffs to bring claims.

Despite the disappointing result for plan sponsors, Justice Samuel Alito’s concurring opinion, joined by Justices Thomas and Kavanaugh, acknowledged the Court’s need to adhere to principles of statutory construction and precedent regarding affirmative defenses. However, it also recognized the realities of ERISA class action lawsuits today and the potential for increased litigation as a result of the decision.  Justice Alito urged lower courts to “strongly consider” using their discretion under Federal Rules of Civil Procedure to require plaintiffs to reply to defendants’ answers to address the affirmative defenses, limit discovery, or shift litigation costs to prevent frivolous lawsuits and manage meritless cases efficiently.

Challenges for Plan Sponsors

The ruling presents significant challenges for plan sponsors, who may face increased litigation risks and potential settlements for routine activities of plan sponsorship. The decision also raises questions about the role of courts in managing ERISA litigation. While the ruling respects the statutory construction of ERISA, it highlights the practical implications for plan sponsors. Congress has enacted major retirement plan legislation over the last seven years placing great emphasis on workplace savings plans for those businesses that do not sponsor plans. Now, with the likelihood of increased risk of litigation for the largest plans that cover the most participants, solutions are needed to ensure the continued plan sponsorship and that plan sponsors continue to take advantage of retirement plan innovations made available through enacted legislation, development of new investment products and technology for the benefit of participants. The importance of ensuring that retirement plans remain a viable and innovative option for securing a dignified retirement for all participants cannot be understated.

Conclusion

The Supreme Court’s decision in Cunningham v. Cornell University marks a pivotal moment in ERISA litigation, with far-reaching consequences for plan sponsors and participants alike. As the legal landscape evolves, it remains to be seen how lower courts will apply the ruling and whether legislative solutions will emerge to balance the interests of plan sponsors and participants.

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