Labor & Employment Law Daily Wrap Up, PENSION AND BENEFIT PLANS—U.S.: Employees needn’t address potential ERISA §1108 exemptions in contesting fees paid to investment companies, (Apr 17, 2025)

By Ronald Miller, J.D.

A plaintiff need only plausibly allege the elements contained in Section 1106(a)(1)(C) itself, without addressing potential Section1108 exemptions.

A unanimous U.S. Supreme Court held that plaintiffs seeking to state a Section 1106(a)(1)(C) claim alleging that a plan fidu­ciary engaged in a transaction proscribed therein need only plausibly allege the elements contained in that provision itself. The exemptions set forth in Section 1108 do not impose additional pleading requirements to make out a Section 1106(a)(1) claim. Un­derstood as affirmative defenses, the Section 1108 exemptions must be pleaded and proved by the defendant who seeks to benefit from them. Thus, the plaintiffs in this action were not required to plead and prove that the myriad Section 1108 exemptions pose no barrier to ultimate relief. Justice Alito wrote a concurring opinion in which Justices Thomas and Kavanaugh joined (Cunningham v. Cornell University, No. 23-1007 (U.S. Apr. 17, 2025)).

Party in interest. ERISA Section 1106 prohibits plan fiduciaries from causing a plan to engage in certain transactions with a party in interest. The Act, in turn, defines “‘party in in­terest’” to include various plan insiders, including the plan’s administrator, sponsor, and its officers, as well as en­tities “providing services to [the] plan.”

This case concerns the prohibited transaction set out in Section 1106(a)(1)(C), which bars a fiduciary from “caus[ing] the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect... fur­nishing of goods, services, or facilities between the plan and a party in interest.”

Section 1108 separately enumerates 21 exemptions to those prohibited transactions. Relevant here is Section 1108(b)(2)(A), which exempts from Section1106(a)(1)(C) any transaction that involves “[c]ontracting or making reasona­ble arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the es­tablishment or operation of the plan, if no more than rea­sonable compensation is paid therefor.”

Retirement plans. Cornell University is the administrator of two defined-contribution retirement plans. University employees maintain individual investment accounts within those plans, the value of which “is determined by the mar­ket performance of employee and employer contributions, less expenses.” Among those expenses are fees paid to service providers.

In 2011, Cornell retained two investment firms, TIAA and Fidelity, to offer investment options to plan par­ticipants and served as recordkeepers for the retirement plans by tracking account balances and providing account statements. Cornell compensated TIAA and Fidelity with fees from a set portion of plan assets.

Recordkeeping services. The petitioners in this action represent a class of current and former Cor­nell employees who participated in the plans from 2010 to 2016. In 2017, they sued Cornell and other plan fiduciaries alleging that the defendants violated Section 1106(a)(1)(C) by causing the plans to engage in prohibited transactions for recordkeeping services. Because TIAA and Fidelity were service providers, the petitioners argued that “their furnishing of recordkeep­ing and administrative services to the [p]lans is a prohib­ited transaction unless Cornell proves an exemption.” The petitioners also alleged that the plans paid TIAA and Fidelity more than a reasonable recordkeep­ing fee. According to the petitioners, a reasonable fee would be ap­proximately $35 per participant per year, but instead the plans paid between $115 to $183 per participant for one plan and $145 to $200 per participant for the other.

Cornell and other plan fiduciaries moved to dismiss the prohibited-transaction claim, and the district court granted their motion. The Second Circuit affirmed on a different ground. It concluded that “the language of §1106(a)(1) can­not be read to demand explicit allegations of ‘self-dealing or disloyal conduct.’” Thus, to limit the reach of Section1106(a)(1)(C), the Second Cir­cuit held the exemptions to Section 1106(a)’s prohibited transac­tions contained in Section 1108 imposed additional pleading re­quirements. In other words, a plaintiff alleging a prohibited transaction under Section 1106(a)(1)(C) must also allege “that [the] transac­tion was unnecessary or involved unreasonable compensa­tion.” Concluding that petitioners had not done so, the Court of Appeals affirmed the dismissal of their Section 1106(a)(1)(C) claim.

Section 1106(a)(1)(C) claim. Section 1106(a)(1)(C) contains three elements. It prohib­its fiduciaries from (1) “caus[ing a] plan to engage in a transaction” (2) that the fiduciary “knows or should know... constitutes a direct or indirect... furnishing of goods, services, or facilities” (3) “between the plan and a party in interest.” Any transaction that satisfies its three elements is presump­tively unlawful. Accordingly, under Section 1106(a)(1)(C), plaintiffs need only plausibly allege each of those elements of a prohibited-transaction claim.

Section 1108 exemptions. The exemptions set forth in Section 1108 do not impose additional pleading requirements to make out a Section1106(a)(1) claim. When a statute has “exemptions laid out apart from the prohibitions,” and the exemptions “expressly refe[r] to the prohibited conduct as such,” the exemptions ordinarily constitute “affirmative de­fense[s]” that are “entirely the responsibility of the party raising” them. Un­derstood as affirmative defenses, the Section 1108 exemptions must be pleaded and proved by the defendant who seeks to benefit from them.

If the defendants establish that a transaction prohibited under Section 1106(a)(1)(C) was for “services necessary for the... operation of the plan” and “no more than reason­able compensation [was] paid therefor,” Section 1108(b)(2), they cannot be held liable for causing the plan to enter into the transaction. At the pleading stage, however, it suffices for a plaintiff plausibly to allege the three elements set forth in Section 1106(a)(1)(C).

Accordingly, the judgment of the Second Circuit was reversed, and the case remanded for further proceedings.

Concurrence. Justice Alito joined the opinion of the Court after observing that 29 U. S. C. Section 1108 sets out affirmative defenses, and it is black letter law that a plaintiff need not plead affirmative defenses. Given that Section 1108 sets out a long list of affirmative defenses, it would make no sense to require a complaint to anticipate and attempt to refute all the affirmative defenses that a de­fendant might raise.

The case is No. 23-1007.

Judge: Sotomayor, S.

Attorneys: Xiao Wang, University of Virginia School of Law, for Casey Cunningham. Nicole A. Saharsky (Mayer Brown) for Cornell University.

Companies: Cornell University

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