Pleading More or Less Under ERISA?

In April 2025, the Supreme Court affirmed a less onerous pleading standard for prohibited transaction claims under the Employee Retirement Income Security Act (ERISA).

Decision: Cunningham v. Cornell University, 145 S. Ct. 1020 (2025)

Congress passed ERISA to protect the interests of employees and their beneficiaries in employee retirement plans. 29 U.S.C. § 1001(b). To this end, plan fiduciaries maintain a duty of loyalty to act “solely in the interest of the [plan’s] participants and beneficiaries.” 29 U.S.C. § 1104(a)(1). ERISA safeguards this duty by barring fiduciaries from engaging in certain transactions. At issue in this case is § 1106(a)(1)(C), which prohibits so-called “conflict-of-interest” transactions where the fiduciary knows or should know that such transaction “constitutes a direct or indirect … furnishing of goods, services, or facilities between the plan and a party in interest.” ERISA, however, exempts transactions that involve “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.” 29 U.S.C. § 1108(b)(2)(A).

Plaintiffs represent a class of current and former Cornell University employees who participated in two retirement plans offered by the university. Cunningham v. Cornell Univ., 145 S. Ct. 1020, 1026 (2025). Cornell retained two companies to track account balances, serve as recordkeepers for the plans, and provide investment options to plan participants. Id. In 2017, Plaintiffs sued Cornell, alleging that the university had engaged in transactions prohibited by § 1106(a)(1)(C) with the two companies. Id. Plaintiffs also alleged that the plans paid the companies more than a reasonable recordkeeping fee. Id. at 1026.

The district court dismissed Plaintiffs’ claim, holding that they failed to allege “some evidence of self-dealing or other disloyal conduct” in addition to their prohibited-transaction claim under § 1106(a)(1)(C). Cunningham v. Cornell Univ., 2017 WL 4358769, at *10 (S.D.N.Y. Sep. 29, 2017). On appeal, the U.S. Court of Appeals for the Second Circuit affirmed this ruling but on different grounds. Cunningham v. Cornell Univ., 86 F.4th 961 (2d Cir. 2023). It found that reading § 1106(a)(1) “in isolation” would lead to absurd results by prohibiting fiduciaries from paying other parties to perform necessary services for employee retirement plans. Id. at 976. To avoid such results, the Second Circuit held that § 1108’s exemptions demanded additional pleading standards—specifically, requiring plaintiffs to show that a defendant’s conduct did not fall under § 1108(b)(2)(A)’s exemption. Id. at 975.

Holding: The Supreme Court reversed the Second Circuit's decision, holding that § 1108 does not demand additional pleading requirements. Cunningham, 145 S. Ct. at 1027. Furthermore, the Court found § 1108’s exemptions to be affirmative defenses, much like the exemptions found in other statutes. Id. at 1028. As such, they should be pleaded and proven by the defendant who seeks to use them, not the plaintiff. Id. A plaintiff is only required to plead the elements under § 1106(a)(1)(C) to bring a prohibited transaction claim under ERISA. It explained: “That Congress enumerated 21 separate exceptions … only heightens the fairness concern, as respondent’s proposed approach would require plaintiffs to plead and dispute myriad exceptions before knowing which of them the defendant will seek to invoke.” Id. at 1030.

The Court also rejected Defendants’ argument that the absence of a heightened pleading standard in this case would result in “an avalanche of meritless litigation.” Id. at 1031. It pointed to several existing tools at the disposal of district courts to dismiss meritless claims. Id. at 1032.

AARP and AARP Foundation filed an amicus brief in support of the current and former Cornell employees challenging the fiduciary’s prohibited transactions in this case.

Implications

The Supreme Court’s decision not to impose additional pleading standards on plaintiffs for claims against fiduciaries who enter into prohibited transactions under ERISA is beneficial to older adults. Studies show that retirement income is unlikely to meet the needs of older plan participants. Because the Court rejected a heightened pleading requirement, older adults now can avoid facing significant hurdles to accessing the legal system to safeguard their retirement earnings they so desperately need as they age.

Stefan Shaibani, SShaibani@aarp.org

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