Supreme Court to Decide ERISA Claim Pleading Standards

The U.S. Supreme Court has agreed to review the pleading standards that plaintiffs must satisfy in Employee Retirement Income Security Act (ERISA) prohibited transactions cases. The case, Cunningham v. Cornell University, involves a challenge of Cornell’s allegedly excessive recordkeeping fees in its retirement plans. We’ve gathered articles on the news from SHRM and other outlets.

Split Among Appellate Courts

At least two federal appeals courts have ruled that plaintiffs alleging prohibited transactions under ERISA only have to allege that such a transaction took place to survive a defendant’s motion to dismiss. But the 2nd Circuit and three other appeals courts have said those lawsuits must also allege that a plan engaged in a prohibited transaction with the intent to benefit a third party, such as a recordkeeper. The Cornell plaintiffs told the Supreme Court that the 2nd Circuit had gone further and misconstrued ERISA “by placing the onus on plaintiffs to negate, rather than on defendants to prove, exemptions to liability.”

Cornell did not immediately respond to a request for comment.

(Reuters)

Pleading Standard Is at Issue

The Cornell employees asked the justices to review the 2nd Circuit’s decision addressing what benefit plan participants must allege to show that an arrangement between a plan and its service provider violates ERISA’s prohibited transaction rules. According to the 2nd Circuit, a prohibited transaction claim based on money paid to a retirement plan service provider must include allegations that the services were unnecessary or that the compensation was unreasonable.

This is wrong and in conflict with the 8th and 9th circuits, the workers said.

(Bloomberg Law)

District Court Dismissed Most of the Workers’ Claims

The U.S. District Court for the Southern District of New York dismissed most of the workers’ claims, except a challenge to the Cornell plan’s use of TIAA-CREF Lifecycle Funds, which the university settled for $225,000 in 2020.

If the Supreme Court were to adopt the pleading standards of the 8th and 9th circuits, it would make agreements with plan service providers and plan sponsors “presumptively unlawful,” said Lindsey Camp, an attorney with Holland & Knight in West Palm Beach, Fla., and Atlanta. She warned that such a ruling would “invite protracted and expensive litigation against fiduciaries who procure plan services, despite a lack of alleged harm or improper conduct.”

(planadviser)

Previous Supreme Court ERISA Ruling

In a separate ERISA case, the Supreme Court in 2022 gave new life to a proposed class-action lawsuit brought by participants in Northwestern University’s retirement plan. The participants claimed that plan fiduciaries breached their duty of prudence under ERISA by charging excessive fees and offering poor investment choices. In 2023, the 7th U.S. Circuit Court of Appeals revived the ERISA lawsuit against Northwestern.

(SHRM and Pensions&Investments)