ERISA class action litigation against retirement plan fiduciaries remains a prominent feature of the legal landscape this year. These lawsuits typically involve allegations that plan fiduciaries acted imprudently in overseeing and managing retirement plans (such as 401(k) and 403(b) plans), leading to alleged “prohibited transactions” that result in excessive fees for investment options, record-keeping services, and administrative management services. The number of these cases began to rise significantly in 2016, with more than 450 excessive fee lawsuits filed between 2016 and 2023. So far in 2024, at least 25 excessive fee lawsuits have been filed against entities like Albertsons Companies, Bank of America, Coca-Cola Southwest Beverage, and Whataburger Restaurants.
Although the number of excessive fee lawsuits filed in 2024 has decreased by 23 cases compared to 2023, the plot thickens with the U.S. Supreme Court’s decision on October 4 to review the Second Circuit’s ruling in Cunningham v. Cornell University. The Second Circuit had affirmed the district court’s dismissal of the plaintiffs’ prohibited transactions claim and certain duty-of-prudence allegations for failure to state a claim. Importantly, the Second Circuit held as a matter of first impression that to state a claim for a prohibited transaction under 29 U.S.C. § 1106(a)(1)(C), it is not enough to allege that a fiduciary caused the plan to compensate a service provider for its services; rather, the complaint must plausibly allege that the services were unnecessary or involved unreasonable compensation.
The Eighth and Ninth Circuits have adhered to the plain text of section 1106(a)(1)(C), while the Second, Third, Seventh, and Tenth Circuits have required plaintiffs to allege additional elements to bring a claim because a “literal reading” of the statute would produce results inconsistent with ERISA’s purpose. These additional elements stem from the exemption outlined in 29 U.S.C. § 1108(b)(2)(A), which provides that “reasonable compensation” paid for “necessary” services to a “party in interest” is exempt from the prohibitions of section 1106(a). The Second Circuit held that this exemption is directly incorporated into section 1106(a)’s definition of prohibited transactions.
The Second Circuit has previously stated that when the exemptions are built into the relevant provision, plaintiffs must at the pleading stage allege that the plan services were unnecessary or involved unreasonable compensation. On December 2, in support of the plaintiff-appellants, the Department of Labor filed an amicus brief arguing that the burden of pleading and proving any exemption should fall on the defendant fiduciary.
The Supreme Court has scheduled oral arguments for Cunningham on January 22, 2025. The court’s decision could lead to a new wave of excessive fee litigation, particularly under section 1106(a)(1)(C), by providing uniform guidance on how courts should interpret these prohibited transaction rules.
