What does it mean for employers?
The Supreme Court resolved a long-running class action lawsuit brought by over 28,000 Cornell University employees, deciding in favor of the plaintiffs. This means a big shift in how Employee Retirement Income Security Act of 1974 (ERISA) cases will proceed in the future. If this sounds familiar to you, that’s because the case was first filed back in 2016.
The plaintiffs (or the employees) alleged that Cornell’s retirement plans paid excessive fees for recordkeeping and admin services, which violates ERISA’s prohibited transaction rules. Cornell stated that the costs were exempt from this ERISA ban on the use of third-party transactions.
The Details: The Supreme Court decided plaintiffs do not need to allege when a plan is exempt to sue under ERISA’s prohibited transaction rules. Instead, those exemptions (like “reasonable compensation” for necessary services) are the employer’s responsibility to identify, raise, and prove. Justice Sonia Sotomayor stated it would be near impossible to expect plaintiffs (again, the employees) to preemptively address the “myriad exemptions,” especially when that type of information is held by the plan’s fiduciaries. Also, the ruling reverses a previous lower court decision and a federal appeals court, making this a landmark decision which may provide opportunities for employees in future cases. Judge Samuel Alito, among others, did warn this could lead to “meritless lawsuits” exposing benefit plans to costly legal challenges.
Other universities, including Duke, Columbia, and the University of Southern California (USC), also paid million-dollar settlements in similar ERISA cases. The Cornell case was part of a broader wave of lawsuits targeting plans for failing to make investment options clear, manage vendors, and/or monitor fees.
What does this all mean for employers AND benefit plan fiduciaries?
- A lower bar to entry for lawsuits. It’s now easier for employees to bring ERISA lawsuits against employers.
- Fiduciaries must defend all fees and vendor actions. Employers and plan sponsors need to be proactive and demonstrate very clearly that any third-party relationships or fees paid are reasonable and in the best interest of plan participants. Documentation and independent benchmarking of fees and services will be a big deal.
- Litigation risk exists for all plans. Whether surviving dismissal (and being settled to avoid costly litigation), cases, like the one against Northwestern University in 2022, suggest that even offering a broad range of investment options in retirement plans doesn’t protect the plan or fiduciaries from claims.
The Synchronomics take? If you sponsor a 401(k), 403(b), or other ERISA-covered retirement plan, now is the time to conduct a thorough fiduciary review. Get to know your responsibilities deeply. Evaluate your vendor contracts, review fee structures, and ensure you have a solid process in place for monitoring plan performance. Employers need to be proactive.
You can read the complete article at 401K Specialist
