Considerations for Plan Sponsors in the Wake of Cunningham v. Cornell

Fee Litigation Against Sponsors Is Trending Up

Excessive fee cases against plans governed by the Employee Retirement Income Security Act (ERISA) have been on the rise for the last decade. ERISA litigation is expanding with novel theories such as forfeiture litigation. Because it is so specialized and cases are often brought as class actions, ERISA litigation is costly for plan sponsors and service providers.

Whereas previously only billion-dollar plans were targeted for lawsuits, smaller plans with far fewer assets are now being sued. According to Plan Advisor, there were a record 53 settlements of ERISA claims in 2024, collectively totaling more than $200 million. The average settlement was $4.6 million. These lawsuits have become a cottage industry for some law firms that have filed multiple (often nearly identical) complaints against several plan sponsors simultaneously.

Pleading Standards Are Mixed

Earlier this year, the U.S. Supreme Court decided Hughes v. Northwestern University, a case in which a fiduciary breach was alleged based on imprudent monitoring of investment options. In Hughes, the plan allowed self-direction of participant accounts and included hundreds of investment options in its investment menu. Some of these investments were performing poorly. The court reversed the Seventh Circuit’s decision, holding that allegedly imprudent plan decisions could be avoided by offering a variety of investment choices. The Supreme Court made clear that one could not avoid fiduciary liability under ERISA section 404 for underperforming funds by just having a wide range of choices from which the participants can choose. Rather, the Supreme Court affirmed that fiduciaries have an ongoing duty to monitor and remove poorly performing investments from the choices regardless of what other investment options exist.

The Supreme Court in Hughes reversed the dismissal and remanded the case to the Seventh Circuit to reevaluate the alleged violation of the duty of prudence and instructing courts to give “due regard to the range of reasonable judgments a fiduciary may make based on … experience and expertise.” The pleading standard requires that a plaintiff allege facts that could plausibly show a breach of fiduciary duty considering the “circumstances then prevailing.” Thus, facts and circumstances become very important to this inquiry. This standard creates a higher bar for plaintiffs to survive a motion to dismiss.

Barriers to Lawsuits Have Been Lowered

However, on April 17, 2025, the Supreme Court may have opened the door for what may be a deluge of litigation with its decision in Cunningham v. Cornell University. In Cunningham, the plaintiffs alleged that Cornell engaged in a prohibited transaction by hiring a record-keeper that charged substantially more than what was reasonable. The court adopted the plaintiffs’ position that alleging a prohibited transaction alone is enough to state a claim, finding no statutory basis for any additional elements in ERISA section 406(a). This lowers the bar for ERISA-based pleadings to survive a motion to dismiss significantly. After Cunningham, plaintiffs who would not have a plausible claim for a fiduciary breach can instead plead that the defendants engaged in a prohibited transaction.

As background, ERISA’s statutory structure provides that all interactions between a plan and “parties in interest” are prohibited transactions under ERISA section 406(a). Parties in interest not only include fiduciaries but also anyone providing services to a plan, i.e., third-party administrators, accountants, record-keepers, consultants, insurers, etc. Thus, plaintiffs now appear to be in the position that any contract with a plan can be challenged as a prohibited transaction at the pleading stage without any additional showing that it might be unreasonable. 

Service providers generally rely on the statutory exemption in ERISA section 408(b)(2), which allows contracting with parties in interest for services necessary for the establishment or operation of a plan, if no more than reasonable compensation is paid and required disclosures are made. A competing view was that section 406(a) incorporated the boundaries of at least section 408(b)(2) and some showing of a conflict or unreasonableness of the contract to move past summary judgment. The court found this position unpersuasive based on the statute’s language and principles of statutory construction. The court held that a plaintiff need not plead additional allegations that a section 406(a) prohibited transaction is not exempt under section 408(b)(2). Now there is clear authority that a prohibited transaction may be pleaded without alleging that the contract is unreasonable or conflicted in any way. The court noted there are 21 exemptions under section 408 and requiring a plaintiff to allege noncompliance with just some of them was incongruous with the established principles of affirmative defenses, noting that section 408(b)(2) exemptions “must be pleaded and proved by the defendant who seeks to benefit from them.” The court further stated that existing mechanisms like Federal Rule of Civil Procedure 7(a), limited discovery, fee shifting, or sanctions could be employed by district courts to manage the litigation and dissuade attorneys from bringing frivolous lawsuits.

Justice Alito, who concurred in the decision based purely on a textual interpretation of the ERISA provisions at issue, expressed concern that the court’s decision will cause “untoward practical results.” Because most plan administrators find it necessary to employ third parties to provide plan services, all a plaintiff must do to state an ERISA section 406(a) claim is “allege that the administrator did something that, as a practical matter, it is bound to do.”

With the new ability of plaintiffs to simply allege that a sponsor engaged in a prohibited transaction, and every sale, exchange, or lease being a prohibited transaction, even those that meet the variety of exemptions, the Cunningham decision puts plan administrators between the proverbial rock and a hard place.

Some People Are Easy Targets

Despite the lower pleading threshold, there are things plan sponsors can do to make a plan less susceptible to litigation or to prevail on the merits. For example:

1. Consider adding an arbitration clause to the plan document. (Some circuits will not enforce a litigation waiver that is part of an employment agreement in the context of ERISA.)
2. Create prudent processes and procedures for selecting, monitoring, and removing plan service providers. Whether the plan’s process is formal or informal, document it.
3. Have a well-developed investment policy statement that has clear guidance on how and when to remove underperforming funds.
4. Have regular meetings of plan trustees and other plan fiduciaries. Ensure that the plan has accounted for the circumstances and reasoning for choices in meeting minutes.
5. Engage the plan’s counsel or service providers for fiduciary training at least annually and ensure any new plan trustees get training up front.
6. Where it makes sense, purchase fiduciary liability insurance. Some policies cover defense costs for an ERISA lawsuit.
7. Consider reviewing your processes and procedures with a legal professional to make sure the plan’s processes and procedures are in line with ERISA’s fiduciary duties.

This list is not exhaustive but provides considerations for plan sponsors and trustees to navigate the new post-Cunningham world.