Certain transactions between employee benefit plans and “parties in interest” are prohibited under the Employee Retirement Income Security Act of 1974, as amended (ERISA). Persons who provide services to the plan, such as recordkeepers, third party administrators, and investment advisors, are included with the definition of the term “party in interest.”
A prohibited transaction can be avoided if the requirements of an exemption to the particular prohibited transaction are met. For example, a contract between a plan and persons who provide services to the plan will not be a prohibited transaction if no more than reasonable compensation is paid for the services provided. In the current spate of excessive fee litigation against plan fiduciaries, a claim that some or all of the plan’s arrangements with service providers constitute prohibited transactions is generally asserted.
On April 17, 2025, the United States Supreme Court issued its unanimous decision in Cunningham v. Cornell, 604 U.S. ____ (2025), specifically addressing the pleading requirements for cases in which participants assert that plan fiduciaries engaged in prohibited transactions. Specifically, the Court held that plaintiffs do not need to assert that the plan fiduciaries failed to meet the requirements of a specific exemption to the alleged prohibited transaction; rather, a general allegation is sufficient. What this means in practical terms is that it is now far easier than it used to be for plaintiffs to withstand a motion to dismiss the complaint, and to initiate costly and time-intensive discovery. The majority and concurring opinions specifically acknowledged the possibility of an increase in meritless claims, and suggested certain tools that district courts can use to screen out these claims.
For example, “if a fiduciary believes an exemption applies to bar a plaintiff’s suit and files an Answer showing as much,” the district court can order the plaintiff to reply to the Answer “putting forth specific, nonconclusory factual allegations showing the exemption does not apply.” (Citations omitted.) Only time will tell how successful district courts will be in keeping the lid on meritless claims making it to the discovery phase of litigation.
Being mindful of (1) plan fiduciaries’ duty to monitor service providers to the Plan regarding the quality of their performance of the services and whether the fees paid for those services constitute reasonable compensation; and (2) the likely increase in excessive fee litigation that may be triggered by the Cunningham decision, plan fiduciaries should also keep in mind the old adage that the best defense is a good offense. Having a regularly scheduled service provider fee benchmarking process (every three to five years) is a “must needed” defense to these types of claims.
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