If after decades of advising retirement-plans I learned one thing, it’s this: The law doesn’t reward you for almost doing everything right — it rewards you for doing it right, and documenting you did it. So when I read the Supreme Court’s unanimous decision in Cunningham v. Cornell University, I sat up in my seat. Because this one isn’t a footnote. It’s a shift.
At issue: employees of Cornell sued claiming the university’s 403(b) plans paid excessive recordkeeping/administration fees, and in the process engaged in “prohibited transactions” 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.
In earlier rulings the 2nd Circuit and others held that plaintiffs had to also plead that no exemption under Section 408 applied — essentially forcing plaintiffs to show up front that the transaction wasn’t “necessary and reasonable.” But the Supreme Court rejected that. It held that the Section 408 exemptions are affirmative defenses for the defendants to plead and prove — 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 “party‐in‐interest.”
In short: More lawsuits will survive motions to dismiss. They’ll get past the gate. That means discovery. That means costs. That means plan sponsors and fiduciaries need to be sharper than ever.
Why This Matters to Plan Sponsors & Fiduciaries
· Lower pleading threshold = higher exposure. Before, many cases died at the complaint stage because plaintiffs couldn’t overcome the “necessary and reasonable” filter. Not anymore. The bar has lowered.
· Almost every contract with a service provider might be challenged. Under the holding, a plan’s payment of assets to a party-in-interest for services can be deemed a prohibited transaction unless the fiduciary can show an exemption applies — but that’s on the defense side. So every recordkeeping, TPA, investment-line contract is now vulnerable.
· Defensive tools are still available — 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.
· Document your fiduciary process and reasonableness of fees. If the lawsuit is going to creep into every service contract, the best defense isn’t hoping no one sues — it’s showing you did your homework, negotiated hard, benchmarked, got competitive bids, monitored.
· This hits higher education (403(b) world) and also applies to 401(k) sponsors. While the case involves Cornell’s 403(b) plans, the legal standard affects any ERISA-covered plan. So private-sector plan sponsors should take note.
What You Should Do, Now (In Plain Ary-Rosenbaum Speak)
· Audit all your service-provider contracts. Pull the roster: recordkeepers, TPAs, investment-line providers, any party-in-interest. For each contract review: What’s the fee? How does it compare to market? When was it last renegotiated?
· Ask your advisor: “When was the last competitive bid?” If it’s been more than, say, 3-5 years (depending on size), you may be exposing yourself.
· Review your committee and fiduciary process. Minutes should reflect: you considered alternatives, you had negotiation leverage, you evaluated reasonableness. If you can’t say that, you’re starting from a weaker position.
· Update your disclosures and communications. Your fiduciary memo should now include: “Because of the Supreme Court’s April 17 2025 decision in Cunningham v. Cornell University, we recognize increased risk under ERISA Section 406 of service-provider contracts.”
· Don’t ignore the cost. Litigation is expensive. Even if you believe you’ll prevail, discovery and motions cost millions. Better to reduce the chance of a claim.
· Consider monitoring litigation risk as part of your fiduciary oversight. Just as you monitor investment performance and fees, assess your “litigation-exposure” profile. What service-provider contracts have the potential to spawn prohibited-transaction suits?
Final Word to the Fiduciary Tribe
As I sit and think of my law-firm days, the dinners where the managing partner poured the wine and said: “Rule 2 – never surprise the audit committee,” I’m reminded that surprises are liabilities in retirement-plan fiduciary work. The Cornell decision isn’t hyperbole-alarm bells — it’s clear: the field has shifted. The plaintiffs’ bar has a wider door. You can still be on the right side of this, but you must act.
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’t wait for the thunder to decide to cover the roof. Get up there now. Metal panels. Secure bolts.
If you’d 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?
