A recent Supreme Court decision has changed the legal landscape for plan sponsors, making it easier for plaintiffs to file lawsuits over how plans do business with service providers. The ruling in Cunningham v. Cornell University has lowered the bar for what plaintiffs need to allege to get their cases past the dismissal stage, according to Carol Buckmann, Co-founding partner and fiduciary and plan governance practice chair at law firm Cohen & Buckmann, in a recent interview with the Plan Sponsor Council of America magazine.
Under ERISA, certain business transactions between retirement plans and related parties—like paying fees to service providers—are considered “prohibited transactions” unless they meet specific exemptions. These rules exist to protect plan participants from conflicts of interest, but they also create legal exposure for plan sponsors since virtually every plan needs to hire recordkeepers, investment managers, and advisors to operate.
Before the April Supreme Court ruling, plaintiffs had to show that plan fiduciaries acted improperly or that fees were unreasonable just to survive a motion to dismiss. Now they can make bare-bones allegations of a prohibited transaction without proving any actual wrongdoing at the outset. This shift opens the door to what Ms. Buckmann called “fishing expeditions” by plaintiffs’ attorneys who can now file lawsuits based on minimal allegations and hope to find problems during discovery.
The practical implications are significant for anyone involved in managing retirement plans. Every plan needs third-party service providers to operate. These relationships create potential prohibited transactions that require exemptions to ensure compliance with ERISA. The difference now is that simply having these relationships in place could trigger a lawsuit, even if fees are indeed reasonable and fiduciaries followed a prudent process.
This means documentation becomes more important than ever. Plan fiduciaries need detailed records showing why service provider arrangements are reasonable and compliant. It’s not enough to know you followed proper procedures; you need documentation from the time you made those decisions to prove it. This includes written records of how you evaluated providers, why you selected them, how you determined their fees were reasonable, and which exemptions (if any) apply to the relationship.
The key is demonstrating a structured, thoughtful process. When selecting or retaining service providers, document the alternatives you considered, the criteria you used to evaluate them, and the reasoning behind your final decision. If you’re relying on an exemption to a prohibited transaction rule, make sure you have clear documentation showing you understand the exemption’s requirements and how your arrangement satisfies them.
Ms. Buckmann emphasized that plan fiduciaries need to ensure they’re using exemptions correctly. This isn’t just about checking a box; it requires understanding which exemption applies, what conditions it imposes, and verifying that your arrangement actually meets those conditions. The new legal environment means you’ll need to defend these decisions even when you’ve done nothing wrong, so your documentation needs to speak for itself.
For plan sponsors and advisors, this ruling serves as a wake-up call about the importance of process and documentation. While the decision makes it easier to file lawsuits, it doesn’t change the underlying standards for what actually constitutes a prohibited transaction or fiduciary breach. What it does change is your ability to get weak cases dismissed early. Now you may need to defend even well-managed plans through more extensive litigation.
The best defense is a strong offense. Review your current service provider relationships and make sure you have solid documentation explaining the rationale behind each one. Establish clear procedures for evaluating and monitoring providers going forward. And most importantly, make sure everyone involved in plan governance understands not just what decisions to make, but how to document them properly. In this new legal environment, the work you do today to document your prudent processes could be the very thing that protects you tomorrow.
