Cunningham v. Cornell University: Shifting the Burden in Prohibited Transaction Claims—Consequences for ERISA 401(k) Class Action Suits and Latest Developments
By Charles C. Shulman, Esq.
Background and Holding—ERISA § 408 Exemptions as Affirmative Defenses
In Cunningham v. Cornell University, 604 U.S. 693 (Apr. 17, 2025), the Supreme Court considered a challenge to recordkeeping and administrative fee arrangements in Cornell University’s defined contribution retirement plans. Participants alleged that the plans paid excessive compensation to recordkeepers and other service providers and that plan fiduciaries failed to prudently monitor those arrangements, thereby permitting the payment of unreasonable compensation for necessary services in alleged breach of their duties of loyalty and prudence under ERISA § 404(a), 29 U.S.C. § 1104(a). In addition to these fiduciary-duty claims, the plaintiffs alleged that the same fee payments constituted prohibited transactions under ERISA § 406(a)(1)(C), 29 U.S.C. § 1106(a)(1)(C), on the theory that the payments were made to service providers that were “parties in interest” to the plans.
The district court and the Second Circuit rejected the prohibited-transaction claim, reasoning that plaintiffs were required at the pleading stage to allege facts showing that the statutory prohibited-transaction exemption for reasonable compensation for necessary services under ERISA § 408(b)(2)(A), 29 U.S.C. § 1108(b)(2)(A), did not apply. The Supreme Court reversed, holding that a plaintiff states a prohibited-transaction claim under § 406(a)(1)(C) by plausibly alleging the existence of a transaction between a plan and a party in interest, and that the applicability of a § 408 exemption is an affirmative defense that must be pleaded and proved by defendants rather than negated by plaintiffs in the complaint.
Practical Consequences for Routine Service Arrangements
Because recordkeepers and similar service providers are, by definition, parties in interest under ERISA § 3(14), 29 U.S.C. § 1002(14), routine service arrangements under Cunningham may constitute prima facie prohibited transactions at the pleading stage, subject only to later proof of an applicable exemption. Taken to its logical conclusion, the Court’s reasoning means that every contract between a plan and a service provider may constitute a prohibited transaction for pleading purposes under ERISA § 406(a)(1)(C) unless and until the fiduciary affirmatively establishes the applicability of a § 408 exemption. Absent that exemption, ordinary plan relationships—including recordkeeping, trustee, custodial, investment advisory, and actuarial arrangements—would be presumptively unlawful at the pleading stage, notwithstanding their ubiquity and arm’s-length nature.
Although the Court acknowledged concerns that its interpretation could expose ordinary plan arrangements to costly and burdensome litigation, it emphasized that district courts retain procedural tools to screen weak claims, including Article III standing requirements, Rule 7(a) replies, limits on discovery, Rule 11 sanctions, and fee-shifting under ERISA § 502(g)(1). In practice, however, these tools typically operate only after litigation has commenced and often after substantial defense costs have already been incurred.
Against that backdrop, and in light of Cunningham, plan sponsors and fiduciaries should assume that ordinary service contracts are more likely to be challenged even in the absence of any real wrongdoing, and should be prepared to explain—on paper and in plain terms—why each service provider was selected, how fees were reviewed, and why the arrangement makes sense for the plan.
Criticism of Cunningham as Expanding Prohibited-Transaction Litigation Beyond Its Intended Scope
Although the Supreme Court characterized Cunningham as a straightforward application of ERISA’s statutory structure, many commentators have noted that the decision is detached from economic reality and the historical purpose of ERISA’s prohibited-transaction rules and fiduciary-duty framework. By permitting prohibited-transaction claims to proceed without any allegation that compensation was excessive, unreasonable, or the product of a flawed fiduciary process, Cunningham allows plaintiffs to challenge routine, arm’s-length service arrangements that have long been understood as permissible so long as compensation is reasonable and services are necessary.
From a litigation perspective, Cunningham encourages plaintiffs to append prohibited-transaction claims to otherwise deficient excessive-fee complaints in order to bypass the demanding pleading standards applicable to ERISA § 404 prudence claims. Because nearly all service providers are parties in interest by definition, plaintiffs need only allege the existence of a service relationship to survive a motion to dismiss under § 406. This dynamic shifts early litigation away from whether fees were excessive or fiduciary decision-making was imprudent and instead places immediate pressure on plan sponsors to defend ordinary plan operations. As a result, ERISA’s prohibited-transaction provisions—historically aimed at preventing self-dealing and conflicted transactions—risk being repurposed as a procedural mechanism to increase settlement leverage in cases where no concrete fiduciary misconduct or participant harm has been plausibly alleged.
Post-Cunningham Decrease in Successful Motions to Dismiss in ERISA Fee Cases
Since the Supreme Court’s 2025 decision in Cunningham, motions to dismiss ERISA fee cases—particularly prohibited-transaction claims under ERISA § 406—have become far less effective. Courts are now increasingly allowing cases to proceed based solely on allegations that a plan paid fees to a service provider that is a party in interest, even without any plausible claim that the fees were excessive. As a result, lawsuits that likely would have been dismissed before Cunningham are now moving into costly discovery, including cases against mid-sized plans that historically were not litigation targets. In response, some defendants have attempted to use Federal Rule of Civil Procedure 7(a) to require plaintiffs to plead around reasonableness before discovery, with mixed success.
Post-Cunningham Case
A U.S. District Judge in California, Daniel Calabretta, in a December 2025 decision in Dalton v. Freeman, No. 2:22-cv-00847, 2025 WL 377134 (E.D. Cal. Dec. 31, 2025), employed Federal Rule of Civil Procedure 7(a) to require the plaintiffs to file a reply addressing defendants’ affirmative defenses, signaling that plaintiffs may be required to do more than merely allege technical statutory violations before subjecting defendants to the substantial burdens of discovery. While Dalton does not retreat from Cunningham, it illustrates how district courts may use procedural tools, particularly Rule 7(a) replies, to mitigate the practical consequences of Cunningham by testing the plausibility of ERISA claims earlier in the litigation process. This approach may provide a roadmap for other courts seeking to balance lowered pleading thresholds with the need to prevent premature and costly discovery in ERISA class actions.
Potential Legislative Developments
Congress has recently focused on the practical consequences of recent ERISA litigation trends. On December 2, 2025, the House Education and Workforce Subcommittee held a hearing entitled “Pension Predators: Stopping Class Action Abuse Against Workers’ Retirement,” examining whether developments such as Cunningham have contributed to an increase in ERISA class actions driven more by procedural leverage than demonstrable fiduciary misconduct. Witnesses and members of Congress expressed concern that lowered pleading thresholds impose substantial litigation costs on plans and ultimately reduce retirement benefits borne by participants themselves.
Other ERISA Fiduciary Claims before the Supreme Court
Following Cunningham, the Supreme Court invited the Solicitor General to express the views of the United States on whether to grant certiorari in two ERISA class actions highlighting significant circuit splits. In one case, the Sixth Circuit allowed an investment-performance challenge to proceed without requiring the plaintiff to plausibly allege a meaningful benchmark, even though other circuits require a benchmark showing meaningful comparability (Parker-Hannifin Corp. v. Johnson, 122 F.4th 205 (6th Cir. 2024)). In the other, the Eleventh Circuit held that ERISA plaintiffs retain the burden of proving loss causation even after establishing a breach of fiduciary duty and a loss, rejecting a burden-shifting framework adopted by several other circuits (Pizarro v. Home Depot, Inc., 111 F.4th 1165 (11th Cir. 2024)). On December 9, 2025, the Solicitor General urged the Court to grant certiorari in both cases, citing entrenched circuit splits, and supported plan sponsor and fiduciary defendants on the merits by endorsing meaningful-benchmark pleading standards and rejecting expansive burden-shifting theories of loss causation—reflecting a shift toward a more pragmatic, common-sense interpretation of ERISA.
Conclusion
Cunningham v. Cornell University represents a significant procedural shift in ERISA litigation, one that lowers the pleading barrier for prohibited-transaction claims while leaving the substantive standards of fiduciary prudence and reasonable compensation formally unchanged. In practice, however, the decision has altered the early dynamics of excessive-fee litigation by allowing routine service-provider arrangements to be challenged before any showing of imprudence or unreasonableness, increasing litigation costs and settlement pressure for plan sponsors and fiduciaries. Whether through future Supreme Court clarification, legislative action, or evolving district-court practice, the post-Cunningham landscape remains unsettled. In the meantime, plan fiduciaries should expect heightened scrutiny of ordinary plan relationships and should focus on documenting, in clear and practical terms, the rationale for service-provider selection and fee oversight—recognizing that procedural exposure, rather than substantive misconduct, is now often the principal litigation risk.
