On April 17, 2025, the U.S. Supreme Court issued a unanimous opinion on the requirements for plaintiffs to survive a motion to dismiss regarding an allegation that plan fiduciaries engaged in a prohibited transaction under the Employee Retirement Income Security Act of 1974 (“ERISA”). Cunningham v. Cornell University, 23-1007 (U.S. 2025).
The case involves the interplay between the prohibited transaction section of ERISA (Section 406) and the prohibited transaction exemption section of ERISA (Section 408). Under Section 406 of ERISA, any transaction between a retirement plan and a service provider is a prohibited transaction. However, Section 408 of ERISA provides that transactions with service providers that are necessary for the administration of the plan and for which reasonable compensation is paid are exempt from Section 406 of ERISA.
In Cunningham, beneficiaries of a Cornell University retirement plan alleged, among other things, that payments made to the plan’s service providers constituted prohibited transactions under Section 406 of ERISA. The district court granted Cornell’s motion to dismiss the prohibited transaction claims, and the Second Circuit Court of Appeals affirmed the dismissal. The Second Circuit reasoned that because Section 408 exempts transactions that are necessary for the administration of a plan and for which reasonable compensation is paid, a plaintiff alleging that a plan fiduciary engaged in a prohibited transaction under Section 406 of ERISA must also allege that the transaction was unnecessary or involved unreasonable compensation (i.e., not exempt under Section 408 of ERISA). The Supreme Court reversed the dismissal, holding that in order to survive a motion to dismiss, the plaintiff need allege only that the plan engaged in a transaction with the service provider, and does not need to address whether the transaction was necessary for the administration of the plan or whether compensation was reasonable.
The Court acknowledged concerns that this ruling could allow meritless litigation leading to costly and time-intensive discovery, but the Court concluded that district courts can use “existing tools at their disposal to screen out meritless claims before discovery.” One of the “tools” pointed to is Rule 7 of the Federal Rules of Civil Procedure, which empowers district courts to insist that plaintiffs file a reply putting forth specific, nonconclusory factual allegations showing that a specific exemption does not apply, and dismissing the case where plaintiffs fail to do so. Other “tools” the Court discussed include requiring plaintiffs to identify an injury from the alleged prohibited transaction or, alternatively, limiting discovery as necessary to mitigate costs.
This case is ultimately a litigation civil procedure decision and should have minimal impact on day-to-day fiduciary duties for plan sponsors and fiduciary committees. We will continue to monitor developments as Cunningham is interpreted by the lower courts.