Sean Brennan
Tues., April 22, 2025
On April 17, the U.S. Supreme Court issued a unanimous decision in Cunningham v. Cornell University that will help workers protect their retirement benefits. The Court held that plaintiffs suing their retirement plan need not address any possible exemptions under the Employee Retirement Income Security Act (“ERISA”) to state a claim. Prior to this decision, courts across the U.S. had been divided on the extent to which plaintiffs must allege self-dealing, fraud, or other specific facts to survive a motion to dismiss. Now, workers seeking to hold their retirement plans accountable for engaging in prohibited transactions will face a clearer path to discovery and, in many cases, settlement.
ERISA – the Federal Law Protecting Private Sector Workers’ Retirement and Health Plans
ERISA is a federal law that protects workers by requiring most voluntarily established retirement and health plans in private industry to comply with minimum standards. These standards include providing information to participants, requiring plan managers who control plan assets to meet fiduciary obligations and avoid self-dealing, and giving participants the right to challenge adverse benefits decisions. At issue in Cunningham, ERISA also prohibits retirement plans from engaging in certain transactions with “parties in interest,” although several exemptions to this prohibition are authorized under the law. In particular, many otherwise prohibited transactions may be exempted (and therefore permitted) where the transaction is “reasonable” or “necessary.”
Cunningham Plaintiffs’ Claims
The plaintiffs in Cunningham alleged that Cornell violated ERISA by failing to adequately monitor employees’ retirement plans. According to plaintiffs, this failure resulted in the plans retaining underperforming investment options and charging excessive fees. Plaintiffs also alleged that Cornell’s retirement plans engaged in prohibited transactions with parties in interest when it retained the plans’ service providers (TIAA and Fidelity) for recordkeeping services at allegedly excessive fees.
A district court in the Southern District of New York dismissed several of the plaintiffs’ claims and later granted summary judgment in favor of Cornell. In an opinion upholding the district court’s decisions, the appellate court (the United States Court of Appeals for the Second Circuit) dismissed the plaintiffs’ case. The Court held that the plaintiffs failed to state a legally actionable claim with respect to Cornell’s recordkeeping transactions with TIAA and Fidelity. According to the Second Circuit, plaintiffs’ lawsuit failed because the complaint did not allege that the “transaction was unnecessary or involved unreasonable compensation.” The Second Circuit reasoned that ERISA’s statutory exemptions should not be construed as affirmative defenses – which defendants have to raise – but should be read as incorporated into the definition of prohibited transactions. As a result, the Second Circuit concluded, because plaintiffs had not included necessary element of their complaint, their case must be dismissed.
Supreme Court’s Decision
The Supreme Court disagreed. Writing for a unanimous Court, Justice Sotomayor pointed to the “well-settled general rule of statutory construction that the burden of proving” any exemption to a statute falls squarely on the party claiming the benefit of the exemption. The Court therefore concluded that any exemptions to the prohibited transactions rule were affirmative defenses, and the defendant was required to raise them. The plaintiffs’ complaint was sufficient, the Court held, so long as it alleged the three basic elements of the relevant ERISA provision: that the plan’s fiduciary (1) caused a plan to engage in a transaction (2) that the fiduciary knew or should have known constitutes a direct or indirect furnishing of goods, services, or facilities (3) between the plan and a party in interest.
What the Decision Means for Plan Participants
The Supreme Court’s decision removes significant hurdles for workers seeking to hold their retirement plans accountable for breaches of fiduciary duties and other ERISA violations.
However, the Supreme Court left open the possibility that plaintiffs may be required to address exemptions, once properly raised by a defendant, before moving forward to discovery. Addressing Cornell’s concerns that a ruling for the plaintiffs would cause “an avalanche of meritless litigation,” Justice Sotomayor pointed to existing tools for weeding out meritless claims. In particular, she highlighted Federal Rule of Civil Procedure 7(a)(7), which allows district courts to insist that the plaintiff file a reply to a defendant’s answer to the complaint. At that point, the district court could require the plaintiff to put forth specific, nonconclusory factual allegations showing that the alleged exemption does not apply. In fact, Justice Alito wrote separately to urge district courts to avail themselves of this rarely used procedural tool.
The Court also highlighted the role of standing analysis in weeding out meritless claims. To have standing to litigate, a plaintiff must demonstrate a connection to and harm from the action they want to challenge. The Supreme Court noted that cases could be dismissed on standing grounds even though a statutory violation is properly pled when the plaintiff fails to allege any concrete injury.
What Workers Can Do to Protect Their Retirement Benefits
It can be difficult to figure out whether your retirement plan is being administered lawfully, and even large, reputable companies and universities, like Cornell (with its plans serviced by TIAA and Fidelity), have been accused of administering their retirement plans in ways that violate ERISA. For more information on your rights, visit MSE’s website.
If you think you are experiencing an issue similar to the one involved in this lawsuit, please reach out to us for a free consultation. We can help you understand your rights and options.
