On April 17th, the U.S. Supreme Court unanimously resolved a circuit split when it held, in Cunningham v. Cornell, that plaintiffs need only “plausibly allege that a plan fiduciary engaged” in a prohibited transaction, “no more, no less.”

Section 406 of the Employee Retirement Income Security Act of 1974 (“ERISA”) prohibits fiduciaries from causing a plan to engage in certain transactions with a party in interest (i.e., a prohibited transaction) unless an exemption applies. ERISA Section 408 sets forth various exemptions, such as the ability to hire a party in interest if its services are “necessary for the establishment or operation of the plan” and “no more than reasonable compensation is paid therefor.”

Plan recordkeepers, such as TIAA and Fidelity, are parties in interest to a plan if they provide services to the plan. As such, their furnishing of recordkeeping services to the Cornell retirement plans would be a prohibited transaction unless an ERISA Section 408 exemption applies (e.g., the services are necessary and the fees are reasonable).

The Second Circuit had held that the burden was on the plaintiffs to plead that the ERISA Section 408 exemption did not apply (e.g., that the fees were not reasonable). The Supreme Court held that ERISA Section 408 sets forth affirmative defenses, so it is the plan fiduciaries “who bear the burden of pleading and proving” that an exemption to the otherwise prohibited transaction applies.  As such, the Court reversed the Second Circuit’s decision in Cornell.

This ruling significantly lowers the pleading threshold for potential plaintiffs bringing an ERISA prohibited transaction claim. However, Justice Sotomayor addressed this concern by explaining that district courts should use Federal Rule of Civil Procedure 7 to “screen out meritless claims before discovery.” Specifically, she explained that when a plan fiduciary asserts in its answer that an ERISA Section 408 exemption applies, the district courts should then require the plaintiffs to set forth “factual allegations” showing the exemption does not apply. As to whether this approach will work in practice remains to be seen.

For more information, please contact a member of our SGR Employee Benefits and Executive Compensation Team.