There is going to be an increase in ERISA lawsuits.
Here’s why . . .
Recent Supreme Court ERISA Decisions: What Financial Advisers Need to Know
A U.S. Supreme Court’s recent decision on ERISA (Employee Retirement Income Security Act of 1974) will reshape the litigation landscape for retirement plan fiduciaries, sponsors, and service providers. For financial advisers, understanding these changes is crucial for risk management and client guidance. The most significant and recent case is Cunningham v. Cornell University (April 17, 2025), which directly impacts how prohibited transaction claims are litigated under ERISA. Here’s a summary of the case, its background, the Supreme Court’s ruling, and practical implications for financial advisers.
Cunningham v. Cornell University: The Core Issue
The central question in Cunningham v. Cornell University was what plaintiffs must allege to bring a prohibited transaction claim under ERISA Section 406. Specifically, the case addressed whether plaintiffs must also plead that none of ERISA Section 408’s exemptions (which allow certain transactions if they meet specific criteria) apply to the transaction in question.
Background
Plaintiffs were current and former employees of Cornell University participating in its defined contribution retirement plans.
They alleged that Cornell’s plans paid excessive recordkeeping and investment management fees to service providers (TIAA and Fidelity), constituting prohibited transactions under ERISA.
Lower courts dismissed the claims, holding that plaintiffs needed to allege that no Section 408 exemption applied (i.e., that the services were not necessary or the fees were unreasonable).
The Supreme Court’s Unanimous Ruling
On April 17, 2025, the Supreme Court unanimously reversed the lower courts. Justice Sonia Sotomayor wrote the opinion, holding:
Plaintiffs only need to allege the basic elements of a prohibited transaction under Section 406 to survive a motion to dismiss.
They do not need to plead facts negating the applicability of Section 408 exemptions; these exemptions are “affirmative defenses” that defendants must prove.
The Court emphasized that ERISA’s prohibited transaction rules must be enforced as written, and courts should not add extra hurdles for plaintiffs at the pleading stage.
Key Elements Plaintiffs Must Allege:
The plan engaged in a transaction,
Involving the furnishing of goods, services, or facilities,
With a “party in interest” (such as a service provider).
Implications for Financial Advisers and Fiduciaries
Lower Bar for Plaintiffs
Plaintiffs can now bring prohibited transaction claims without having to anticipate and counter possible exemptions at the outset.
This makes it easier for lawsuits to survive early dismissal and proceed to costly discovery, increasing litigation risk for plan sponsors and fiduciaries.
Increased Litigation Risk
The decision resolves a split among federal appeals courts and is expected to lead to more ERISA lawsuits, especially those involving 401(k), 403(b), and ESOP plans.
Plaintiffs’ attorneys are likely to be emboldened to file more claims, knowing the initial pleading standard is less demanding.
Defensive Strategies for Advisers
Documentation: Maintain thorough records of all plan-related decisions, especially regarding service provider selection, fee benchmarking, and the necessity and reasonableness of services and investment advice.
Process Review: Update fiduciary processes and governance structures to ensure compliance with ERISA’s duty of loyalty and prudence.
Proactive Communication: Educate plan sponsors and committees about the increased risk and the importance of fiduciary best practices.
Conclusion: What Advisers Should Do Now
The Supreme Court’s recent ERISA decision in Cunningham v. Cornell University, significantly lower the bar for plaintiffs to bring prohibited transaction claims.
Financial advisers should:
Review their firm’s fiduciary processes and documentation.
Emphasize regular investment reviews and ongoing advice.
Prepare for increased scrutiny and potential litigation over advice arrangements.
By proactively addressing these areas, advisers can better protect themselves from costly legal challenges which may be increasing in the coming years.
And if you are not 100% sure of your duties to your clients when operating as an ERISA Fiduciary, check out our ERISA Best Practices Course for financial advisers by CLICKING HERE.