The U.S. Supreme Court is set to review the pleading standards that plaintiffs must meet in cases involving prohibited transactions under the Employee Retirement Income Security Act (ERISA). This critical case, titled Cunningham v. Cornell University, centers on allegations of excessive recordkeeping fees associated with Cornell’s retirement plans.
Currently, there is a split among various federal appellate courts regarding the necessary criteria for plaintiffs to survive a motion to dismiss in these types of cases. Some courts have determined that merely alleging that a prohibited transaction occurred is sufficient. In contrast, the 2nd Circuit and three other appellate courts have mandated that plaintiffs must also demonstrate that the plan acted with the intent to benefit a third party, such as a recordkeeper.
The plaintiffs from Cornell University have argued that the 2nd Circuit’s ruling misinterprets ERISA by shifting the burden of proof onto them, requiring them to negate potential defenses rather than placing the onus on defendants to prove exceptions to liability.
The crux of the issue lies in the pleading standards established by the 2nd Circuit, which require that claims regarding payments to retirement plan service providers must include allegations that the services provided were unnecessary or that the compensation received was unreasonable. This requirement has been contested by the Cornell employees, who argue that it conflicts with the standards set by the 8th and 9th Circuits.
In a prior ruling, the U.S. District Court for the Southern District of New York dismissed most of the claims brought forth by the workers, allowing only a challenge regarding the use of TIAA-CREF Lifecycle Funds to proceed. This specific matter was settled by Cornell University for $225,000 in 2020.
If the Supreme Court decides to align with the pleading standards of the 8th and 9th Circuits, it could significantly alter the landscape for agreements between plan service providers and plan sponsors, making such arrangements
