Last week, on April 17, 2025, the Supreme Court resolved a circuit split on the appropriate pleading standard for a specific type of prohibited transaction claim under ERISA. While that decision may sound dry and technical, the practical impact is significant. The Court made it much easier for plaintiffs to state a claim, and harder for defendants (plans and plan sponsors) to get these claims dismissed at a very early stage of the litigation. This client alert discusses the case—Cunningham v. Cornell University—and important takeaways for plan sponsors.
Cunningham v. Cornell University
In this case, the plaintiffs were past and current participants in Cornell's 403(b) defined contribution plans. They alleged that Cornell (and other fiduciaries) breached their fiduciary duties by contracting with the plans' recordkeepers and paying the recordkeeping fees out of plan assets. Technically, this constitutes a "prohibited transaction" under ERISA because it involves using plan assets to pay for services provided by a "party in interest" of the plan. What makes this so notable is that every service provider by definition is a "party in interest" of a plan. Everyday service provider relationships rely on an exemption for necessary services for which reasonable compensation is paid. Cornell argued that the reasonable compensation exemption applied, and that plaintiffs had failed to state a claim because the plaintiffs had failed to allege that the fees were unreasonable. The Court held that the plaintiffs only needed to allege the occurrence of the transaction. According to the Court, it would be Cornell's burden to allege, as an affirmative defense, that the "reasonable compensation" exemption applied.
Applicability and Impact
Cunningham has broad applicability—it is not limited to 403(b) plans. It applies to all ERISA-covered plans, not only retirement plans but also health and welfare plans. It is not limited to recordkeepers. It applies to all service providers—consultants, attorneys, actuaries, investment advisors, third-party administrators, and others—if they are paid out of plan assets rather than being paid directly by the plan sponsor. (There might be an argument that the first contract with a brand-new service provider cannot be a prohibited transaction, but that is a detail for another day.)
Cunningham will have a significant impact on ERISA litigation. Prior to this decision, the Third, Seventh, and Tenth Circuits required the plaintiffs to allege that the transaction involved self-dealing or disloyal conduct. The Second Circuit required the plaintiffs to allege that the transaction was unnecessary or involved unreasonable compensation. The Supreme Court has relaxed those requirements and allowed plaintiffs to allege simply that the service provider is being paid out of plan assets. Unfortunately for plans and plan sponsors, the new pleading requirements are not at all difficult to meet. We anticipate a noticeable uptick in prohibited transaction litigation.
Next Steps for Plan Sponsors
Plan sponsors will want to take steps to bolster their ability to prove that service provider compensation is reasonable or, in the alternative, to prove that the compensation is paid from company assets rather than plan assets. Those steps could include one or more of the following:
- Identify all of a plan's service providers and whether they are paid out of plan assets
- Determine whether it is economically feasible for the plan sponsor (the employer) to pay service providers directly, out of general assets
- Assess the plan's procedures for evaluating whether a service provider's fees are reasonable (consider both the request-for-proposal process and the contract-renewal process)
- Ensure that the processes and the evaluation described above are documented
- Regularly review service provider fee arrangements to monitor whether fees remain reasonable
