Supreme Court will hear ERISA class action suit: Did Cornell Univ. mismanage its 403(b) plan?

On Oct. 4, the U.S. Supreme Court agreed to review a ruling that dismissed a class action lawsuit on behalf of 28,000 Cornell University employees accusing the school’s retirement plans of paying excessive recordkeeping fees.

Filed in 2016, Cunningham v. Cornell University claims that Cornell and its fiduciaries breached their ERISA duties by:

• Offering certain investment products (CREF Stock Account, Money Market Account, TIAA Traditional Annuity) that were not in the best interest of participants.
• Failing to effectively monitor and control recordkeeping fees.
• Failing to effectively monitor and offer appropriate investment options.

This lawsuit was one of several lawsuits that year, accusing colleges and universities of violating ERISA by failing to adequately monitor retirement plans, drop underperforming investments or limit fees, and not the first to reach the Supreme Court. Duke, Columbia, the University of Southern California and Washington University in St. Louis have paid as much as $13 million to settle ERISA cases in recent years, while denying wrongdoing

The justices agreed to review a ruling by the New York-based 2nd U.S. Circuit Court of Appeals that dismissed a class action on behalf of Cornell University employees accusing the school’s retirement plans of paying excessive recordkeeping fees, among other claims. “We are pleased that the Supreme Court accepted the case, and that it will now review our position that summary judgment should not have been granted in this case,” said Jerome Schlichter, a lawyer for the plaintiffs.

“The Supreme Court agreed to hear the case to resolve a conflict among the federal courts of appeals regarding the pleading standard for an ERISA ‘prohibited transaction’ claim,” said Schlichter, who is a pioneer in legal action against 401(k) and 403(b) plan sponsors on behalf of retirees and savers.

“The Second Circuit in the Cornell University case ruled that the plaintiff has the burden of alleging that the defendant caused such a transaction, but also that the defendant will be unable to prove that the transaction qualifies for an ‘exemption,’ even though the exemptions are affirmative defenses,” he said. “Other courts of appeals have not required a plaintiff to preemptively rebut a defense to state a claim.

“The case is important because Congress intended that the prohibited transaction rules would supplement the general fiduciary duties of loyalty and prudence. In other words, the prohibited transaction rules provide additional protection for plan participants to prevent misuse of their retirement assets. The Cornell decision will establish the requirements for plan participants to proceed with such a claim and may provide guidance regarding the standards for service provider contracts in retirement plans.”

Plaintiffs alleged that Cornell failed to adequately monitor the fees and investments of its 403(b) plan. “Although the lower courts found Cornell’s investment-monitoring to be adequate, the trial court found that there was sufficient evidence that recordkeeping fees were imprudently monitored to proceed to trial,” said Schlichter.

“However, the court nevertheless dismissed the recordkeeping fee claim due to a lack of evidence that the imprudent monitoring had caused a financial loss,” he said. “One reason that the prohibited transaction issue is important is that instead of requiring the plaintiff to prove a loss, the burden can be placed on the defendant to show that the fees are reasonable in order to avoid a prohibited transaction.”

Related: Supreme Court to hear Northwestern 403(b) fee case: Why it’s important to all plan sponsors

The Supreme Court is expected to hear the Cornell case in 2025.”Oral arguments may be in February and a decision could come at any time before the term ends in June,” said Schlichter.