The Department of Labor has asked the Supreme Court to support former participants in two Cornell University 403(b) plans who allege the plans’ charged excessive fees and that the plans’ contracts with the record keepers violated federal law.
The court has set Jan. 22 for oral arguments for Cunningham et al. vs. Cornell University et al., an 8-year-old case viewed by industry members as an opportunity for the Supreme Court to establish guidance because various appeals courts have issued differing opinions on ERISA’s prohibited transactions rules.
The DOL and Solicitor General Elizabeth Prelogar filed an amicus brief Dec. 2, saying the key issue is whether plaintiffs must show that defendants engaged in prohibited transactions or whether defendant fiduciaries must show they are covered by ERISA exemptions.
“ERISA is most naturally read to place the burden of pleading and proving the (ERISA) exemptions on the defendant fiduciary,” the DOL wrote.
ERISA’s list of prohibited transactions covers such areas as self-dealing by fiduciaries, improper contracts and transactions that carry a high risk to plan assets because of contracts that transfer to third parties the responsibilities reserved for fiduciaries.
ERISA also contains a broad list of exemptions such as providing investment advice, loans to plan participants, loans to employee stock ownership plans and contracts for life insurance or annuities.
In this 8-year-old lawsuit against Cornell, the former participants have lost at the District Court level and at the appeals court level, rulings the DOL criticized as incorrectly interpreting ERISA.
Both the U.S. District Court in New York and the 2nd U.S. Circuit Court of Appeals, New York, placed the responsibility on the former participants, which the DOL said was wrong.
A section in ERISA identifies 21 exemptions to the prohibited transactions guidelines and DOL is authorized to issue additional exemptions. This provision “reinforces the conclusion that the defendant bears the burden of identifying, pleading and proving the particular exemption on which it seeks to rely,” the DOL wrote.
The lawsuit started in August 2016 as a challenge to the Cornell 403(b) plans’ arrangements with two record keepers — TIAA-CREF and Fidelity Investments, neither of which is a defendant.
The plaintiffs accused the Cornell plans of allowing excessive record-keeping fees, citing this as a prohibited transaction. The plaintiffs argued that the record keepers are a party-in-interest, which is subject to prohibited transaction rules — unless they receive an ERISA exemption — for lending money, furnishing goods or services, transferring assets and other activities.
Plaintiffs also accused Cornell and its fiduciaries of failing to remove poor-performing investments, failing to monitor fees and offering expensive mutual fund share classes when cheaper share classes were available.
A U.S. District Court judge in New York rejected most of the complaints in 2017 and 2019, saying allegedly high fees was not an example of self-dealing or “disloyal conduct” in violation of ERISA’ s prohibited transactions rules.
The 2nd Circuit supported the District Court, saying in November 2023 that the plaintiffs did not allege facts “going to the relative quality of the record-keeping services provided.” Their failure to do so defeated their claim of a prohibited transaction, the court ruled.
(The only victory for the plaintiffs was a $225,000 settlement, approved by the federal District Court in December 2020, regarding the claim that the university and its fiduciaries failed to adopt lower-cost shares of a target-date fund series.)
In their March 2024 petition to the Supreme Court, plaintiffs asked for uniform guidance on how appeals courts and District Courts interpret prohibited transactions rules and what sponsors must do to secure exemptions.
The petition said various courts disagree on whether a plaintiff can claim a prohibited transaction based on a “strict reading” of ERISA or whether a plaintiff “must plead and prove additional elements and facts not contained in the provision’s text."
The Cornell plaintiffs argue that prohibited transaction claims should be based on the former. They said two appeals courts take this view, but four appeals courts apply the latter interpretation.
Cornell responded in July 2024, telling the Supreme Court, that “a contract for necessary plan services at a reasonable cost is not a prohibited transaction under ERISA.”
Cornell also argued there is no circuit split — disagreement among appeals courts — and that this complaint is “a poor vehicle for further review.”
The Cornell University Retirement Plans for the Endowed Colleges at Ithaca had $2.8 billion in assets and the Cornell University Tax Deferred Annuity Plan had $2.2 billion in assets, both as of Dec. 31, 2023, according to the latest Form 5500s. Both plans are based in Ithaca, N.Y.
