The Supreme Court issued a ruling recently that will make it easier for plaintiffs to allege that fiduciaries of employee benefit plans have violated provisions of the Employee Retirement Income Security Act of 1974 (ERISA) by engaging in “prohibited transactions” in Cunningham v. Cornell University.

This case was initiated by current and former Cornell University employees who sued Cornell claiming that it violated ERISA by not adequately managing the administrative costs of their 403(b) plan. Under ERISA, fiduciaries are prohibited from (1) engaging in transactions (2) that a fiduciary knows or should know…constitute a direct or indirect…furnishing of goods or services or facilities (3) between the plan and a party in interest. Parties in interest include recordkeepers. The Court held that any action that meets these elements is a prohibited transaction under ERISA and presumed to be unlawful unless they qualify for an exemption as outlined in ERISA § 408(b) (Note that although this case involved a 403(b) plan, the conclusions apply to 401(k) plans as well).

The plaintiffs alleged that Cornell engaged in prohibited transactions in their use of two recordkeeping services:

  • The Teachers Insurance and Annuity Association of America – College Retirement plan (TIAA); and
  • Fidelity Investments Inc.

The use of these two recordkeeping entities is said to have caused fees to reach between $115 and $200 per participant per year. The allegation was that a reasonable fee level is approximately $35 per participant per year.

Courts have held that, while ERISA does not require every fiduciary to scour the market to find and offer the cheapest possible fund, fiduciaries must engage in a prudent review process which includes review of fees for reasonableness.

Lower Court Rulings

The federal district court granted Cornell’s motion to dismiss on the grounds that the plaintiffs did not specifically allege “some evidence of self-dealing or other disloyal conduct” as a result of the prohibited transaction. The Second Circuit Court of Appeals affirmed the lower court ruling, but on different grounds. The Second Circuit held that to make a prohibited transaction case, the plaintiffs must state why the exemptions to the prohibited transaction rules in ERISA § 408(b) do not apply. In this case, the Second Circuit concluded that the plaintiffs did not allege that the transaction at issue was unnecessary or involved unreasonable compensation and, therefore was not exempt under ERISA § 408(b).

The Supreme Court

The Supreme Court reversed the  Second Circuit and found that a plaintiff need only make a plausible allegation that a fiduciary engaged in a prohibited transaction.  The exemptions in the statute must then be pled and proven as an affirmative defense by the plan administrator. The Supreme Court acknowledged that their ruling could lead to more cases, but noted that courts have tools to address meritless claims.

Employer Impact

The ruling by the Supreme Court lowers the standard for plaintiffs to make allegations against plan fiduciaries. Current industry practices like the hiring of recordkeepers or establishing contracts for certain administrative tasks can all be alleged as prohibited transactions without the need for further justification of the merits of this claim. Employer fiduciaries of retirement plans should take steps to show that they are properly keeping administrative costs down. This could include reviewing TPA agreements and competitive bidding. It is also important to document any review process.

For more information, please contact:

Mark Williams
Counsel
[email protected]
203.575.2618

Nick Zaino
Partner
[email protected]
203.5784270

Authors: Mark Williams practices in Carmody Torrance Sandak and Hennessey LLP’s Employee Benefits group. Maurice Clarke is a summer associate at Carmody and rising second-year law student at UCONN Law School.

This information is for educational purposes only, to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.