Cornell Beats Retirement Plan Class Action in Second Circuit

Cornell University defeated an appeal challenging the investments and recordkeeping fees in its workers’ retirement plan when the Second Circuit on Tuesday affirmed a decision granting the school summary judgment over most claims in the 28,000-person class action.

In rejecting the Cornell workers’ claims under the Employee Retirement Income Security Act’s prohibited transaction rules, the US Court of Appeals for the Second Circuit took a position on a circuit split and held for the first time that a prohibited transaction claim based on money paid to a retirement plan service provider must include allegations that the services were unnecessary or that the compensation was unreasonable.

The court appeared to chart a middle ground between the narrow approaches of the Third, Seventh, and Tenth circuits, which have declined to apply ERISA’s prohibited transaction rules to cast doubt on routine retirement plan service contracts, and the broader approaches of the Eighth and Ninth circuits, which have allowed plan participants to challenge these arrangements under the statute’s prohibited transaction rules.

According to the Second Circuit, a prohibited transaction claim doesn’t require explicit allegations of self-dealing or disloyal conduct, but it must include allegations that the transaction was either unnecessary or backed by unreasonable compensation. Although the statutory text of ERISA treats these factors as affirmative defenses to be raised by the plan sponsor, they’re also necessary elements of a plaintiff’s claim, the court said.

“When one cannot articulate what the statute seeks to prohibit without reference to the exception, then the exception should be understood as part of the definition of the prohibited conduct—and thus its inapplicability must be pled,” the court said.

University Plans

The court also rejected a challenge to the Cornell plan’s recordkeeping fees, saying the workers didn’t present sufficient evidence to show how these fees caused them to suffer losses. Their challenge to certain plan investments also failed, the court said, because they didn’t show how Cornell’s process for monitoring these investments was flawed.

The ruling affirms a 2019 decision rejecting nearly all of the Cornell workers’ ERISA claims involving their plan’s fees and investments. The workers were allowed to proceed with one claim challenging the plan’s TIAA-CREF target-date funds, but the parties later settled this matter for $225,000.

Cornell is one of more than 20 prominent universities to be accused of mismanaging their retirement plans in violation of ERISA since 2016. These cases have spawned nearly $140 million in settlements, two trials, multiple appeals court rulings, and a US Supreme Court decision.

The opinion was written by Judge Debra Ann Livingston and joined by Judges Amalya L. Kearse and Michael H. Park.

Schlichter Bogard LLP represents the Cornell employees. Mayer Brown LLP represents Cornell.

The case is Cunningham v. Cornell Univ., 2d Cir., No. 21-88, 11/14/23.