The Cunningham v. Cornell Burden-Shift and Judicial and Legislative Pushback
By Charles C. Shulman, Esq.
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 allegedly 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) 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), Cunningham renders routine service arrangements 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 most routine contracts between a plan and a service provider constitute a prohibited transaction under ERISA § 406(a)(1)(C) for pleading purposes 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 “fishing expeditions,” it emphasized that district courts retain procedural tools to screen weak claims, including Article III standing requirements, Rule 7(a) orders, 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, 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 specific 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 described Cunningham as a straightforward application of ERISA’s statutory structure, many commentators have questioned whether the decision aligns with economic reality and the historical purpose of ERISA’s prohibited-transaction rules and fiduciary-duty framework. By allowing prohibited-transaction claims to proceed without any allegation that compensation was excessive, unreasonable, or the result of a flawed fiduciary process, Cunningham permits plaintiffs to challenge routine, arm’s-length service arrangements that have traditionally been viewed as permissible so long as compensation is reasonable and services are necessary.
From a litigation standpoint, Cunningham makes it easier for plaintiffs to add prohibited-transaction claims to otherwise weak excessive-fee complaints in order to avoid the more demanding pleading standards that apply to ERISA § 404 prudence claims. Because nearly all service providers qualify as parties in interest, plaintiffs generally need only allege the existence of a service relationship to survive a motion to dismiss under § 406. This 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—originally intended to prevent self-dealing and other prohibited transactions—risk being used primarily as a procedural tool to increase settlement leverage in cases where no concrete fiduciary misconduct or participant harm has been plausibly alleged.
Post-Cunningham Reduction 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 been granted less frequently. Courts are increasingly allowing cases to proceed based solely on allegations that a plan paid fees to a service provider that qualifies as a party in interest. As a result, lawsuits that likely would have been dismissed before Cunningham are now advancing into costly discovery, including cases involving mid-sized plans that historically were not frequent litigation targets.
Judicial Pushback
Rule 7(a): In response to Cunningham, more courts are utilizing Federal Rule of Civil Procedure 7(a) to require plaintiffs to file a reply to an answer regarding reasonableness and exemptions before allowing discovery to proceed, as the Supreme Court in Cunningham suggested. For example, in Dalton v. Freeman, No. 2:22-cv-00847, 2025 WL 3771345 (E.D. Cal. Dec. 31, 2025), a California federal court ordered a Rule 7(a) reply to compel plaintiffs to address ERISA exemptions with “specific, nonconclusory factual allegations” before discovery could begin. Although the plaintiffs had survived a motion to dismiss by alleging a “prohibited transaction” under the Cunningham standard, the court used Rule 7(a) to address the “procedural issue” that otherwise allows “meritless” cases to reach discovery.
Article III Standing: A recent 2026 ruling highlights how courts are using Article III standing as a “constitutional gatekeeper” to dismiss prohibited transaction claims that might otherwise satisfy statutory pleading requirements. In Peeler v. Bayada Home Health Care, Inc., No. 1:24-cv-00231-MR, 2026 WL 208630 (W.D.N.C. Jan. 27, 2026), a North Carolina federal court dismissed an ERISA class action for lack of Article III standing, holding that a “bare allegation” of a relationship with a party in interest is insufficient without specific allegations of a concrete injury. The court held that despite recent Supreme Court guidance lowering the statutory pleading bar for prohibited transactions, plaintiffs must still identify a non-speculative financial loss actually affecting their individual accounts to satisfy constitutional requirements. Ultimately, the court found the plaintiffs’ allegations were too speculative because they failed to show that their own account balances declined or that the recordkeeping and advisory services provided weren’t worth what the plan paid. The court dismissed the claims without prejudice, reinforcing that statutory violations alone do not confer standing.
Suit for Attorney Fees to Shift to Plaintiffs’ Law Firm in Baseless Claim. Beyond procedural rules, courts are exploring fee-shifting to deter meritless litigation. In November 2025, a U.S. district judge granted summary judgment to the defendants in Whipple v. Southeastern Freight Lines, Inc., No. 3:23-cv-04583-SAL (D.S.C. Nov. 25, 2025), dismissing a class action that alleged the company paid $3.5 million in excessive 401(k) recordkeeping fees. The ruling for the employer hinged on the court’s Daubert exclusion of the plaintiffs’ sole expert witness, which prevented them from establishing loss causation under ERISA. Following this dismissal, the defendants filed a motion in early 2026 under ERISA § 502(g)(1) to shift over $1 million in defense costs specifically to the plaintiffs’ law firm (but not to the named participants). In an unusual but growing trend, the defense cited Cunningham guidance to argue that the firm itself bear these costs to deter “baseless” class actions that exploit lower pleading standards to force expensive discovery.
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,” which examined whether developments such as Cunningham have contributed to an increase in ERISA class actions driven more by procedural leverage than by demonstrable fiduciary misconduct. Witnesses and members of Congress expressed concern that lower pleading thresholds may impose substantial litigation costs on plans and ultimately reduce retirement benefits borne by participants.
On March 17, 2026, the House Education and Workforce Committee passed the ERISA Litigation Reform Act (H.R. 6084) by a vote of 19-13. This bill aims to (i) shift the burden of proof back to plaintiffs, requiring them to plausibly allege that a transaction isn’t exempt under Section 408 at the pleading stage, (ii) require “meaningful benchmarks” for performance claims, (iii) mandate an automatic stay of discovery while a motion to dismiss is pending, and (iv) require plaintiffs to prove that service provider fees were neither reasonable nor necessary. Proponents argue this restores the “innocent until proven guilty” principle for plan fiduciaries.
Evolving Theories: Pleading Standards and Loss Causation
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. On December 9, 2025, the Solicitor General urged the Court to grant certiorari in Parker-Hannifin Corp. v. Johnson and Pizarro v. Home Depot, Inc. (both cited below) and supported plan sponsor and fiduciary defendants on the merits. This reflected a shift toward a more pragmatic interpretation by endorsing meaningful-benchmark pleading standards and rejecting expansive burden-shifting theories of loss causation.
Pleading Standards: Parker-Hannifin and Intel Corp. In Parker-Hannifin Corp. v. Johnson, 122 F.4th 205 (6th Cir. 2024), the Sixth Circuit allowed an investment-performance challenge to proceed without requiring the plaintiff to plausibly allege a “meaningful benchmark,” which allows the court to determine whether plaintiffs have alleged plausible claims to survive a motion to dismiss, an approach taken by some circuits, while other circuits merely require a showing of meaningful comparability. While the Solicitor General urged the Court to hear the case and reverse the Sixth Circuit’s lenient standard, the Supreme Court is still considering whether to grant certiorari as of March 2026. However, the Court has already agreed to resolve this specific “meaningful benchmark” split in a related case, Anderson v. Intel Corp. Investment Policy Committee, the Court granted certiorari in January 2026.
In Anderson v. Intel Corp. Investment Policy Committee, 137 F.4th 1015 (9th Cir. 2025), participants in its retirement plans alleged that trustees imprudently invested in risky hedge funds and private equity that yielded lower returns than traditional investments. The Ninth Circuit affirmed the dismissal of the participants’ claims, ruling that they failed to plausibly allege a breach of fiduciary duty under ERISA as the complaint did not provide meaningful benchmarks with similar investment aims, risks, and objectives. The Supreme Court granted review on January 16, 2026, to resolve whether plaintiffs challenging investment underperformance must identify a “meaningful benchmark” at the pleading stage to satisfy ERISA’s duty of prudence.
Loss Causation: Pizarro v. Home Depot, Inc. In Pizarro v. Home Depot, Inc., 111 F.4th 1165 (11th Cir. 2024), 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. The Solicitor General supported this view, arguing that the burden should remain with the plaintiffs. Following the filing of the Solicitor General’s brief, the plaintiffs chose to abandon their appeal, and the Supreme Court therefore dismissed the petition on January 8, 2026.
