Supreme Court Rides to the Rescue in ERISA Excessive Fee Lawsuit

Washington, DC Sometimes the sheer procedural clutter of so many ERISA lawsuits obscures what is important. The U.S. Supreme Court’s April 17, 2025 holding in Cunningham v. Cornell University is one of those cases. The bottom line, however, is that the Court preserved the ability of ERISA plan participants to sue fiduciaries for wasting their retirement savings by overpaying for administrative services. The opinion, authored by Justice Sonya Sotomayor, is also virtually certain to be lawyered and parsed down to its semicolons as counsel for plan sponsors and administrative service providers strive to limit its application.

Overpaying for administrative services

In 2017, more than 28,000 individuals who had participated in two Cornell University retirement plans between 2010 and 2016 brought a class action ERISA lawsuit alleging that the plans had violated ERISA by overpaying for recordkeeping services provided by TIAA-CREF and Fidelity Investments Inc. As with all individual account plans, the funds paid for administrative services are deducted from the participant accounts. Higher fees means less money for retirement.

A brief dive into the prohibited transaction rules (and some legalese)

ERISA section 404 requires those responsible for managing retirement plans (the “fiduciaries”) to act prudently to protect the assets for the benefit of retirement savers. Certain kinds of transactions are forbidden (called “prohibited transactions”) to prevent those who may exercise improper influence over the plan (called “parties in interest”) from doing so. The rules are mind-bendingly complicated.
Briefly, however, a transaction is prohibited only if three things are true. ERISA requires all three:

a fiduciary causes a plan to engage in a transaction; and
he or she knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities to the plan; and
the transaction is between the plan and a party in interest.

Not only are the rules complicated, but there are many exceptions, based largely on whether the cost of the transaction is reasonable. Cunningham hinges on a distinction between the three basic elements and the myriad of exceptions.

Tossed out of court twice

Cunningham was originally heard in the Southern District of New York. The trial court granted the defendants’ motion to dismiss the case for failure to state a cause of action. This basically means that it was not possible for the court to determine, just on the initial complaint, whether ERISA had been violated. The original complaint dealt only with the three basic elements of prohibited transactions. It did not deal with the range of possible exceptions into which each individual transaction might fall. On appeal, the Second Circuit affirmed the SDNY’s decision.

The plaintiffs sought review by the Supreme Court, which reversed the Second Circuit’s decision. This brings us to April 2025.

What it means

The Supreme Court’s recent decision means that, after eight years of legal wrangling, Cunningham now has a green light to go to trial on the merits. That is all.

The plaintiffs could win; they could lose; or they may choose to settle if Cornell University makes an acceptable offer. There may be further appeals.

That may not seem like much for all the time, effort and money spent, but it is actually very significant. Without the Supreme Court’s Cunningham decision, it could be very difficult for retirement plan participants to initiate an ERISA lawsuit because they would have to anticipate every argument fiduciaries might make about the application of tens (if not hundreds) of exceptions to the prohibited transaction rules before the fiduciaries make those arguments.

A three-step dance

All that plaintiffs must show, at step one is that:

a fiduciary authorized a transaction that
allowed a third party to provide goods, services or facilities to the plan and
the third party might arguably be in a position to exercise improper influence over plan decisions.

In other words, there is the potential for self-dealing.

At step two, the defendants may argue that, even though the first three elements are present, the transactions are not prohibited because they fall within an exception. (In legalese, this is known as an “affirmative defense.”)

At step three, the plaintiffs and defendants may argue about whether one or more exceptions apply.

Why it matters

As of December 31, 2022, a total of $37.8 trillion was held in U.S. retirement plans and accounts, of which $26.3 trillion was in employer-sponsored plans. That is a very large chunk of money.

In addition to retirement savers, many entities, including service providers and investment managers would like a piece of it, thank you very much. ERISA provides a way for plan participants to protect the money they have saved, but court-developed rules (often under the guise of “preventing excessive litigation”) can make their efforts extraordinarily difficult and time consuming. Cunningham is important because it eases that burden.