Supreme Court Decision Shifts Burden in ERISA Fee Dispute Case

On April 17, 2025, the U.S. Supreme Court issued a unanimous decision in Cunningham v. Cornell University allowing employees to challenge specific fee arrangements between their employer and retirement plan service providers under the Employee Retirement Income Security Act (ERISA). The Court adopted an employee-friendly interpretation of the law, making it easier for workers to bring claims involving alleged prohibited transactions.

Overview of Prohibited Transactions Under ERISA

ERISA sets forth fiduciary standards that plan administrators must follow, including a core duty of loyalty to plan participants and beneficiaries. The law also prohibits specific types of transactions between retirement plans and parties deemed to have a conflict of interest, such as service providers. However, ERISA includes exceptions, such as permitting service provider agreements if the fees involved are deemed reasonable for the services rendered.

Case Background

The case arose from claims brought by Cornell University employees, who argued that the university violated ERISA by allowing its retirement plans to overpay for recordkeeping services. The fees, which were deducted from participant accounts, allegedly exceeded what would be considered reasonable compensation.

Previously, the 2nd U.S. Circuit Court of Appeals had dismissed the case, stating that the employees needed to prove that the exemption for reasonable fees did not apply. The Supreme Court, however, overturned that decision, clarifying that plaintiffs only need to assert that a prohibited transaction occurred. Once alleged, it becomes the fiduciary’s responsibility to demonstrate that an exemption applies, such as paying no more than a reasonable fee.

Potential Impact

This ruling lowers the threshold for initiating claims under ERISA’s prohibited transaction rules, potentially leading to increased employee lawsuits. While the Court acknowledged concerns about the risk of frivolous litigation and increased administrative costs for plan sponsors, it emphasized that lower courts have tools to dismiss baseless claims early in the legal process.

Employers should regularly review their benefit plan arrangements, especially in relation to fiduciary duties and service provider compensation, to reduce exposure to such claims. Ensuring that fees are reasonable and well-documented can help demonstrate compliance and reduce legal risks.