If after decades of advising retirement-plans I learned one thing, it\u2019s this: The law doesn\u2019t reward you for almost doing everything right \u2014 it rewards you for doing it right, and documenting you did it. So when I read the Supreme Court\u2019s unanimous decision in Cunningham v. Cornell University, I sat up in my seat. Because this one isn\u2019t a footnote. It\u2019s a shift.<\/p>\n
At issue: employees of Cornell sued claiming the university\u2019s 403(b) plans paid excessive recordkeeping\/administration fees, and in the process engaged in \u201cprohibited transactions\u201d under the Employee Retirement Income Security Act of 1974 (ERISA). They alleged that the plan had contracts with service providers (parties-in-interest), and argued that those contracts thus triggered Section 406(a)(1)(C) of ERISA.<\/p>\n
In earlier rulings the 2nd Circuit and others held that plaintiffs had to also plead that no exemption under Section 408 applied \u2014 essentially forcing plaintiffs to show up front that the transaction wasn\u2019t \u201cnecessary and reasonable.\u201d But the Supreme Court rejected that. It held that the Section 408 exemptions are affirmative defenses for the defendants to plead and prove \u2014 the plaintiffs simply need to allege the core elements of a prohibited transaction: (1) a fiduciary caused the plan to engage in a transaction; (2) the transaction involved the furnishing of services, goods or facilities; (3) the transaction was between the plan and a \u201cparty\u2010in\u2010interest.\u201d<\/p>\n
In short: More lawsuits will survive motions to dismiss. They\u2019ll get past the gate. That means discovery. That means costs. That means plan sponsors and fiduciaries need to be sharper than ever.<\/p>\n
Why This Matters to Plan Sponsors & Fiduciaries<\/p>\n
\u00b7 Lower pleading threshold = higher exposure. Before, many cases died at the complaint stage because plaintiffs couldn\u2019t overcome the \u201cnecessary and reasonable\u201d filter. Not anymore. The bar has lowered.<\/p>\n
\u00b7 Almost every contract with a service provider might be challenged. Under the holding, a plan\u2019s payment of assets to a party-in-interest for services can be deemed a prohibited transaction unless the fiduciary can show an exemption applies \u2014 but that\u2019s on the defense side. So every recordkeeping, TPA, investment-line contract is now vulnerable.<\/p>\n
\u00b7 Defensive tools are still available \u2014 but you must use them. The Court told lower courts to use Federal Rule of Civil Procedure 7(a)(7), early discovery limits, fee awards, sanctions for frivolous pleadings. But these are reactive tools; the proactive risk remains.<\/p>\n
\u00b7 Document your fiduciary process and reasonableness of fees. If the lawsuit is going to creep into every service contract, the best defense isn\u2019t hoping no one sues \u2014 it\u2019s showing you did your homework, negotiated hard, benchmarked, got competitive bids, monitored.<\/p>\n
\u00b7 This hits higher education (403(b) world) and also applies to 401(k) sponsors. While the case involves Cornell\u2019s 403(b) plans, the legal standard affects any ERISA-covered plan. So private-sector plan sponsors should take note.<\/p>\n
What You Should Do, Now (In Plain Ary-Rosenbaum Speak)<\/p>\n
\u00b7 Audit all your service-provider contracts. Pull the roster: recordkeepers, TPAs, investment-line providers, any party-in-interest. For each contract review: What\u2019s the fee? How does it compare to market? When was it last renegotiated?<\/p>\n
\u00b7 Ask your advisor: \u201cWhen was the last competitive bid?\u201d If it\u2019s been more than, say, 3-5 years (depending on size), you may be exposing yourself.<\/p>\n
\u00b7 Review your committee and fiduciary process. Minutes should reflect: you considered alternatives, you had negotiation leverage, you evaluated reasonableness. If you can\u2019t say that, you\u2019re starting from a weaker position.<\/p>\n
\u00b7 Update your disclosures and communications. Your fiduciary memo should now include: \u201cBecause of the Supreme Court\u2019s April 17 2025 decision in Cunningham v. Cornell University, we recognize increased risk under ERISA Section 406 of service-provider contracts.\u201d<\/p>\n
\u00b7 Don\u2019t ignore the cost. Litigation is expensive. Even if you believe you\u2019ll prevail, discovery and motions cost millions. Better to reduce the chance of a claim.<\/p>\n
\u00b7 Consider monitoring litigation risk as part of your fiduciary oversight. Just as you monitor investment performance and fees, assess your \u201clitigation-exposure\u201d profile. What service-provider contracts have the potential to spawn prohibited-transaction suits?<\/p>\n
Final Word to the Fiduciary Tribe<\/p>\n
As I sit and think of my law-firm days, the dinners where the managing partner poured the wine and said: \u201cRule 2 \u2013 never surprise the audit committee,\u201d I\u2019m reminded that surprises are liabilities in retirement-plan fiduciary work. The Cornell decision isn\u2019t hyperbole-alarm bells \u2014 it\u2019s clear: the field has shifted. The plaintiffs\u2019 bar has a wider door. You can still be on the right side of this, but you must act.<\/p>\n
Your plan is a promise to participants. Not just of return on investment, but of prudent stewardship of their future. When you outsource services, you are still the fiduciary. The storm of litigants may be coming. Don\u2019t wait for the thunder to decide to cover the roof. Get up there now. Metal panels. Secure bolts.<\/p>\n
If you\u2019d like, I can draft a one-page briefing memo you can present to your plan committee summarizing the Cornell decision and its implications (ready-to-go, Word-doc style). Would you like that?<\/p>\n
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