When you work and part of your compensation goes toward a retirement benefit, you want to make certain it is protected. Fees and loss of investment earnings are two threats to your 401(k). While earnings and losses understandably fluctuate, fees are more constant and if they are excessive, that is an unwelcome threat.

Within the last 15 years, 401(k) excessive fee challenges have become much more common than before.  After enjoying some success initially, these cases became more difficult in some circuits. The Supreme Court finally weighed in with the case Cunningham v. Cornell Univ., No. 23-1007, 2025 U.S. LEXIS 1458, (Apr. 17, 2025), and clarified the standard as to what makes a good 401(k) excessive fees case.

Cornell University employees had 401(k) plans in place when some noticed that the fees were much higher than in other 401(k) plans for other employers. Naturally, that raised some concern. Fees on plans elsewhere might be about $35 per year per participant while the fees on their Cornell plan were ranging between $115 and $183.  To make matters worse, those receiving the fees were "parties in interest."  They were in control of the plan and already furnishing other services, such as offering investment options.  Now taking a fee for recordkeeping services looked like a conflict of interest, especially when the rate looked high.

The statute at 29 U.S.C.S. § 1106, lists several prohibited transactions. The list precludes a “party in interest” from using the plan to benefit the “party in interest” with certain transactions. A “party in interest” is a plan administrator, a plan sponsor or other similar position with fiduciary duties. Basically, you can't operate the plan in a way to benefit yourself and then charge the participants for that.

 A lawsuit was filed and in response the defendants with the alleged conflict of interest filed a motion to dismiss. The district court agreed to dismiss the case, because it found that 29 U.S.C. § 1108 contained a list of exceptions to the prohibited transactions.  Thus, the plaintiffs must also plead that none of the exceptions in §1108 applied.  The case was appealed and the Second Circuit agreed with the lower court, finding that §1108 can't be understood to merely be an affirmative defense statute. Pleading §1108 with § 1106 was required.

The Second Circuit parted from the path of the Eighth Circuit which had previously ruled that you did not have to plead that none of the exemptions from §1108 applied. See, Braden v. Wal-Mart Stores, Inc., 588 F. 3d 585, 600-602 (8th Cir. 2009). That created a circuit split and so the Supreme Court agreed to hear the appeal.

 In a show of unanimity, the Supreme Court reversed the lower courts and clarified that plaintiffs bringing prohibited transaction claims under the Employee Retirement Income Security Act (ERISA) do not have to satisfy additional pleading requirements of pleading §1108 and §1106.  Thus, the only key elements that must be plead are:

1.               A fiduciary caused the plan to engage in a transaction.

2.               The fiduciary knows or ought to know that there is a direct or even indirect “furnishing of goods, services or facilities".

3.               That transaction is between the plan and a party in interest (a plan administrator or plan sponsor or other such fiduciary).

Thank goodness for this case! §1108 is long. If downloaded as a PDF, the statute is 21 pages long not counting the history and relevant case citations which bump it up to 81 pages long.  Clearly, defense counsel could easily turn a simple case into a legal morass at the pleading stage.  Plaintiffs could not easily extract themselves from this bog. The added pleading rule required a degree of definitiveness that might be difficult if not impossible to precisely ascertain at the pleading stage.  What mattered the most was the lack of prudence and loyalty to the plan participant.

 While there was much protest from the defense bar about meritless litigation, the Supreme Court reminded that there are numerous tools in place to assist on that.  The greater danger is protecting from impropriety. So, while ERISA remains the reticulated statute with much complexity and interconnectedness, what makes a 401(k) excessive fees case has now been made much simpler. Just plead §1106!