On April 17, 2025, the U.S. Supreme Court issued a unanimous decision in the closely watched Cunningham v. Cornell University case, settling a long-standing legal controversy. The controversy: Who bears the burden of proof in the initial stages of a “prohibited transaction” or “excessive fee” ERISA lawsuit? The now “settled”
answer: The defendant.
THE SUPREME COURT’S LOGIC: This complaint was originally filed in 2016 on behalf of the approximately 28,000 Cornell University employees participating in its multiple 403(b) plans. The plaintiffs argued the plans’ structure, with multiple recordkeepers and a significant number of investment alternatives, forced participants to pay unnecessary and excessive fees. This Supreme Court decision reverses the 2nd Circuit Court of Appeals which had previously upheld a lower court’s decision to grant Cornell’s motion to dismiss the case due to failure to provide compelling evidence of a breach. The Supreme Court found the Plaintiff’s argument persuasive, that plan fiduciaries have a duty to ensure that no more than reasonable costs are paid by plan participants and that because ERISA provides plan fiduciaries specific exemptions to prohibited transactions, they should shoulder the burden of proof that they’ve complied with these exemptions.
MITIGATING THE SUPREME COURT’S CONCERN: With this ruling, the Supreme Court acknowledged it has potentially opened a Pandora’s box of “meritless” litigation by lowering the burden of proof for an already hyper-aggressive plaintiff’s bar. To mitigate this concern, the Court suggested a few ways defendants may limit their exposure:
— Lower courts may require plaintiffs to respond to a defendant’s affirmative defense that only Reasonable Compensation was paid prior to a dismissal decision.
— Lower courts can dismiss claims for lack of standing if the plaintiff fails to show a plausible injury, present some allegation of unreasonable fees.
— If Reasonable Compensation Exemption is obvious, allow defendant to ask for sanctions against plaintiff, including attorney’s fees.
PLAN SPONSOR TAKEAWAYS: This much anticipated decision should remind all plan sponsors of the duties and responsibilities they accept when deciding to offer their employees a qualified retirement benefit. As you learn in fiduciary training, under ERISA, it’s not the decisions you make that are important, it’s about the process you follow to make them. Now that it’s easier for plaintiffs to bring a complaint, plan sponsors will do well to remember:
— Know the rules. Mandate ERISA fiducary training for anyone in your organization who has a decision-making role in your organization’s qualified retirement benefits.
— Create a prudent process. Clearly outline responsibility within your organization for oversight of your plan. This process starts with a board resolution delegating authority over your plan. A committee charter is often helpful, and an Investment Policy Statement is absolutely necessary.
— Document all decisions. Once your process is put in place, maintain good records of all meetings and all fiduciary decisions regarding the plan, including the rationale for all decisions made. Quarterly meetings are currently the industry standard.
— Properly communicate to plan participants. For defined contribution plans, ones in which participants are asked to make many critically important decisions, be sure to communicate clearly and completely about the plan, its features, its fees, and participants’ responsibility to make their own decisions.
— Audit your results and activities. An annual review of plan utilization, the reasonableness of all plan fees using industry benchmarks, and a checklist of compliance with the plan’s operational requirements is best practice.
The information contained herein is provided for informational purposes only. The information provided is from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Francis LLC does not offer personal legal advice.
