Fiduciaries Face Higher ERISA Litigation Risk After SCOTUS Ruling

The US Supreme Court’s unanimous decision in Cunningham v. Cornell University significantly shifts the pleading standard for prohibited transaction claims under Section 406(a)(1)(C) of the Employee Retirement Income Security Act. The ruling carries substantial practical consequences for fiduciaries and plan sponsors of all ERISA-governed plans, including 401(k)-style retirement plans, pensions, and health-and-welfare arrangements.

Routine use of third-party retirement plan service providers—a longstanding, prudent fiduciary practice—may now become an even more frequent litigation target, notwithstanding the already substantial volume of litigation in this space.

Under the ruling, plaintiffs no longer are required to affirmatively plead statutory exemptions are inapplicable under ERISA Section 408(b)(2)(A); instead, fiduciaries now carry the burden of pleading and proving these exemptions. Merely alleging that a fiduciary authorized a transaction with a “party in interest” for compensation—such as routine arrangements with recordkeepers, investment managers, or consultants—could suffice to survive early dismissal.

This is because although ERISA Section 408(b)(2)(A) permits fiduciaries to engage service providers for necessary plan services—as long as no more than reasonable compensation is paid—that exemption is now by law an affirmative defense. As such, it can’t be considered under the normal rules applied to a motion to dismiss.

Generally, the easier a pleading standard is to meet for any class or class-like claim, the more likely a potential defendant of such a claim becomes a target, because many such claims settle at or in discovery because of the expense in time and effort to defend such claim regardless of the merits.

As Justice Samuel Alito cautioned in his concurrence, the court’s broader interpretation lowers the pleading threshold, enabling claims to advance based solely on ordinary fiduciary actions.

After Cunningham, pleading the existence of a recordkeeper of an ERISA plan receiving compensation passes the pleading threshold. Because of the complexity of administering such plans, virtually all of them have such relationships. Therefore, almost any plaintiff can survive a motion to dismiss even when the fiduciary hasn’t committed wrongdoing.

Recognizing the practical implications of its ruling, the majority directly addressed concerns about potentially increased meritless litigation and cited what Alito described as “[p]erhaps the most promising” safeguard: the use of Federal Rule of Civil Procedure Rule 7(a)(7) replies.

Under Rule 7(a)(7), a court can order a reply to an answer requiring the plaintiff to address specific affirmative defenses. If the reply fails to plausibly rebut the defense, the defendant may then move for judgment on the pleadings under Rule 12(c). Rule 12(c) functions similarly to a motion to dismiss but is brought after the answer and affirmative defenses have been raised. The Supreme Court also identified Article III standing scrutiny, targeted discovery management, sanctions, and ERISA’s fee-shifting provisions as mechanisms available to mitigate litigation risks.

The endorsement of Rule 7(a)(7) replies, which requires plaintiffs to directly address affirmative defenses at an early litigation stage, stands out as particularly novel in ERISA litigation, and civil litigation more generally. Although traditionally employed in qualified immunity cases—where government officials assert immunity defenses that require plaintiffs to promptly clarify their allegations—the court now endorses this procedural device for ERISA cases in which an affirmative defense is relevant at the pleadings stage.

This explicit endorsement signals that ERISA plaintiffs may increasingly need to promptly address fiduciaries’ affirmative defenses, including statutory exemptions. Given Rule 7(a)(7)'s novelty in the ERISA context, courts and litigants may require several years to fully adapt.

Plaintiffs may argue that district courts should decline to impose this requirement—particularly where they contend discovery is necessary to respond. If widely permitted, Rule 7(a)(7) replies could become an important tool for efficiently screening out meritless claims and potentially reducing discovery burdens.

Article III standing, which requires plaintiffs to demonstrate a concrete injury to maintain a lawsuit in federal court, is another important procedural safeguard. In Cunningham, the court reaffirmed that even if a prohibited transaction has occurred, plaintiffs must still plausibly allege personal harm. This reminder may prompt fiduciaries to assert standing challenges more aggressively, especially where plaintiffs fail to clearly tie their alleged injury to the specific transaction challenged.

Additionally, the Supreme Court’s guidance on discovery management may strengthen fiduciaries’ ability to advocate for phased or targeted discovery early in litigation.

Some district courts are wary to delay the onset of discovery, which adds to the pressure to settle early regardless of merit. The Supreme Court’s statement may persuade more district courts to become active in managing discovery this way in these actions.

Finally, the Supreme Court highlighted additional deterrents against meritless claims: Rule 11 sanctions and ERISA’s fee-shifting provisions under Section 1132(g)(1). Fiduciaries should consider that these tools have historically seen limited use in ERISA litigation and will likely remain most effective only in plainly meritless or repetitive cases.

Although the Supreme Court outlined procedural mechanisms to help fiduciaries manage litigation risk, its decision undeniably favors plaintiffs. Plaintiffs will now find it notably easier to advance claims past the motion-to-dismiss stage. Fiduciaries and plan sponsors should anticipate increased filings of prohibited transaction claims, including challenges to routine plan arrangements.

As more cases proceed past the pleadings stage, the decision’s long-term impact will largely hinge on how district courts apply the procedural safeguards endorsed by the Supreme Court.

Given this evolving landscape, defense counsel should proactively adapt their litigation strategies. Counsel should assert affirmative defenses under ERISA Section 408 exemptions, actively pursue standing challenges, carefully evaluate targeted use of Rule 7(a)(7) replies, and advocate for a discovery stay to address any Rule 12(c) motions and clearly sequenced discovery.

Fiduciaries can also mitigate risk by reinforcing governance and compliance practices. To best position themselves, fiduciaries should ensure that their decision-making is thoroughly documented. Regular benchmarking of service-provider fees, clearly articulating the necessity of services, and carefully documenting competitive vendor-selection processes will help fiduciaries persuasively demonstrate compliance with ERISA Section 408 exemptions and strengthen defenses in litigation.

The case is Cunningham v. Cornell University, U.S., 23-1007, decided 4/17/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tim McDonald is a partner in the Labor & Employment practice group, as well as the employee benefits and executive compensation practice group.

Nate Ingraham is a senior managing associate in the employee benefits and executive compensation practice group.

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