KEY POINT: The Encore Fiduciary Guide to the January 22 Supreme Court Argument: After losing their excessive fee case against Cornell University in the district court, the Schlichter firm appeals to the Supreme Court, seeking a mulligan by recasting their failed fiduciary imprudence claim as a prohibited transaction to avoid having to allege plausible proof that the plan’s fees are excessive. If allowed to proceed, this open-door pleading standard would encourage more ERISA class action litigation abuse, creating the right for plaintiff law firms to conduct litigation audits of any plan sponsor.
On January 22, 2025, the Supreme Court will hear arguments in Casey Cunningham v. Cornell University. The case involves the pleading standard for ERISA prohibited transaction claims. Cornell’s defense team advocates for a pleading standard that requires plausible proof that service provider contracts were unreasonable – the same proof needed to bring a normal fiduciary imprudence claim. Plaintiff lawyers, by contrast, want an open-door pleading standard that allows them to challenge any service provider contract in any ERISA-covered plan with no upfront proof that any participant has been harmed. It is ERISA’s most absurd case.
For over fifteen years, the plaintiff trial bar has sued plan sponsors in hundreds of cases for purported excessive fees or investment underperformance in company-sponsored retirement plans based on circumstantial evidence. They have pursued a narrative that plan fiduciaries were asleep at the wheel, allowing plan service providers to overcharge for plan administration and investment fees. In these lawyer-manufactured cases, plaintiffs have asked courts to infer fiduciary malpractice based on comparisons to cherry-picked plans that supposedly have lower fees, or plans with investments that achieved higher returns. These comparisons may not be meaningful or credible, and are often intentionally deceptive and misleading, but at least plaintiff firms made some overt effort to assert that participants were harmed by high fees or poor investment performance. While many of these cases were meritless, plaintiff firms at least filed lawsuit after lawsuit under the pretense that they were addressing legitimate fiduciary imprudence by America’s plan sponsors.
But in the Cornell appeal to be argued on January 22 in the Supreme Court, we have reached what the Chamber of Commerce’s amicus brief calls a “turning point” in ERISA class action litigation. The Schlichter firm and the trial bar association supporting them as amicus have dropped the pretense that they are suing plans that have been mismanaged. Plaintiffs in the Cornell case are now asking the court for an automatic right, without plausible proof of any wrongdoing, to bring fiduciary breach claims against plan sponsors as prohibited transactions based merely on identifying that the plan entered into a service provider agreement. They want the right to bring fiduciary-breach prohibited transaction class actions with no proof of excessive or unreasonable fees. The cases would be filed with no proof as to why these routine service agreements should be prohibited. They argue that plan sponsors are essentially guilty until proven innocent – that plan sponsors must prove the reasonableness of any transaction in any lawsuit challenge. Surprisingly, even the Department of Labor, regulating by amicus brief, dubiously agrees with plaintiffs’ position – at least to some extent, as we will explain below.
In this inflection point in ERISA litigation, plaintiff firms have dropped the pretense that these excessive fee cases are about helping participants or addressing actual fiduciary misconduct. As we explained in our amicus brief to the Supreme Court, plaintiffs’ position would turn the prohibited-transaction provisions of ERISA into sources of radioactive liability for plan fiduciaries, creating an automatic right for any participant to sue plan fiduciaries for simply running the plan.
It is one thing to serve as ERISA’s police by suing for legitimate wrongdoing. But now ERISA plaintiff law firms want what amounts to regulatory authority to file litigation audits: sue, and then find out, under the pressure and cost of litigation, what plan fiduciaries might have done wrong.
The temerity of plaintiff’s position in the Cornell case must be considered with the perspective that plaintiffs have already lost their excessive fee claims under ERISA rule 404 prudence rules. More than lose, the district court excluded their expert for using unreliable junk science to support made-up excessive fee models. Plaintiffs never had any proof of excessive fees when they first filed the case. There was never proof that other university plans only paid the $35 per participant they claimed in the excessive fee complaint. It was a fake benchmark. Plaintiffs could not persuade the district court that Cornell’s retirement plan had excessive fees after eight years of litigation. To the contrary, the record showed a track record of Cornell fiduciaries working with a top-rated investment advisor CAPTRUST to make deliberate and wholesale changes to the plan over a period of time. Plaintiffs have already lost their excessive fee claim because Cornell followed best fiduciary processes. Instead, they seek a mulligan to recast their failed excessive fee claim as an as automatic prohibited transactions under ERISA rule 406.
This appeal is not about the facts of the individual Cornell case, which has already been lost, and would be lost again even if the Schlichter firm wins in the Supreme Court. The case is about the future of ERISA litigation: will plaintiff firms be allowed to sue any plan in America for the simple fact that they hired a service provider, like a routine recordkeeper or an investment advisor? Will plaintiff lawyers be able to repackage fiduciary breach claims as prohibited transactions to avoid having to plead plausible proof of wrongdoing? The case is about whether unelected plaintiff lawyers are the regulatory auditors of America’s benefit plans. The stakes are real.
Simply put, the Cornell case is ERISA’s most absurd case. The following is a summary of the key issues to prepare for the January 22 oral argument.
The Prohibited Transaction Rule at Issue in the Cornell Appeal
The Supreme Court has previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 241-42 (2000), that ERISA “supplements the fiduciary’s general duty of loyalty to the plan’s beneficiaries” “by categorically barring certain transactions deemed ‘likely to injure the pension plan.” Specifically, Section 1106(a)(1), Section 1106(a)(1) states that, “[e]xcept as provided in section 1108,” a fiduciary “shall not cause the plan to engage” in certain transactions with a “party in interest.” Among the “prohibited transactions” is the “furnishing of goods, services, or facilities between the plan and a party in interest.” 29 U.S.C. 1106(a)(1(C). A “party in interest” is defined to include various plan insiders (such as the plan’s administrator, sponsor, and its officers), as well as entities “providing services to [the] plan. 29 U.S.C. 1002(14). Section 1108 separately enumerates 21 transactions to which “[t]he prohibitions provided in section 1106 of this title shall not apply.” 29 U.S.C. 1108(b). One of the exempted transactions is “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.” 29 U.S.C. 1108(b)(2). Section 1108 also authorizes the Secretary of Labor to promulgate additional regulatory exemptions, 29 U.S.C. 1108(a); there are dozens of class exemptions and hundreds of individual exemptions currently in effect.
The question presented in the Cornell appeal is whether the reasonable-arrangements exemption in Section 1108(b)(2) is incorporated into the goods-and-services prohibition set form in Section 1106(a)(1)(2), such that a plaintiff must plead facts negating that exemption to state a claim under Section 1106(a)(1)(C). A participant sued Cornell and its plan fiduciaries in 2017, alleging that plan fiduciaries had violated ERISA by breaching the duty of prudence and by causing the plans to engage in prohibited transactions for recordkeeping services in violation of 29 U.S.C. 1106(a)(1)(C). Petitioners contended that “because TIAA and Fidelity are service providers and hence parties in interest, their furnishing of recordkeeping and administrative services to the plans is a prohibited transaction unless Cornell proves an exemption.” Petitioners alleged that the plans had “paid substantially more than . . . a reasonable recordkeeping fee.” Specifically, they alleged that a reasonable recordkeeping would be a fixed $35 per participant, but the plans instead used a revenue sharing agreement with two recordkeepers that caused participants to pay between $115 and $183 per participant for one plan, and $145 to $200 per participant for another.
The district court dismissed the prohibited-transaction claims at the motion to dismiss stage, but allowed the prudence claims to survive dismissal. It held that a plaintiff must allege “some evidence of self-dealing or other disloyal conduct to plead a violation of Section 1106(a) in connection with the provision of services.” The court believed that petitioners’ allegations “that the plans paid too much for [the recordkeeping] services” did not suffice to allege such self-dealing or disloyal conduct.
The Second Circuit Court of Appeals affirmed the dismissal of the prohibited transaction claim. The court acknowledged that “[r]evading section 1106(a)(1)(C) in isolation,” “ERISA would appear to prohibit payments by a plan to any entity providing it with any services.” The Second Circuit noted, however, that several of its sister circuits had rejected that reading, believing it would lead to “absurd results” by “prohibit[ing] fiduciaries from paying third parties to perform essential services in support of a plan.” (emphasis added). Those courts, like the lower district court, has endorsed “different means of narrowing the statute,” including by requiring the plaintiff to allege that the fiduciary intended to benefit a party in interest or to engage in self-dealing. The Second Circuit rejected those atextual limitations, explaining that “the language of section 1106(a)(1) cannot be read to demand explicit allegations of ‘self-dealing or disloyal conduct.’”
Instead, the Second Circuit adopted a different approach to interpreting 1106(a). The court determined that “at the pleadings stage,” the Section 1108 exemptions cannot “be understood merely as affirmative defenses to the conduct proscribed in section 1106(a).” Rather, the court continued, Section 1106(a)’s cross-reference to Section 1108 indicates that “the exemptions set out in section 1108 . . . are incorporated directly into section 1106(a)’s definition of prohibited transactions.” The court reasoned that “read on its own,” Section 1106(a)(1)(C) is “missing an ingredient of the offense”: namely, “the exemption for ‘reasonable compensation’ paid for ‘necessary” services, reflected in section 1108(b)(2)(A).” The court believed that “[i]t is only by incorporating that exemption into the prohibition set out in section 1106(a)(1)(C), and thus limiting its reach to unnecessary or unreasonable compensation, that the offensive conduct the statute discourages can ‘be accurately and clearly described.’”
Applying that rule, the court of appeals held that petitioners’ allegations that fiduciaries had caused the plan to engage in transactions that “constitute[d] a direct . . . furnishing of goods, services, or facilities” with parties in interest did not suffice to state a claim under Section 1106(a)(1)(C). And although petitioners had also alleged “that the plans paid substantially more than . . . a ‘reasonable recordkeeping fee,’” the court reasoned that “[w]hether fees are excessive or not is relative “to the services rendered.’” Because petitioners had not “allege[d] any facts going to the relative quality of the recordkeeping services provided,” the court held that petitioners’ complaint had failed to negate Section 1108(b)(2)’s reasonable-arrangements exemption.
KEY POINT #1: Plaintiffs’ Position is Absurd Because It Would Allow a Fiduciary-Breach Lawsuit Challenging Any Service Provider Contract.
Petitioners’ position is that any transaction between a plan and a service provider is a prohibited transaction under ERISA. That means any time a plan uses an investment manager, recordkeeper, consultant, attorney, accountant, or any other routine service provider, the plan fiduciaries have violated ERISA. A participant could sue plan fiduciaries in their personal capacities and subject them to lengthy litigation. Pleading the mere fact of a service-provider transaction would allow the plaintiff to obtain burdensome discovery, and there is nothing the fiduciaries could do about it until (perhaps) summary judgment. Plaintiffs want the right to sue with no restrictions or guardrail. Cornell’s brief asserts that “[i]t would be a free-for-all.”
Petitioners’ position would create an “absurd” result of turning every transaction with a service provider into a per se prohibited transaction. The risk is that the decision will provide, as Cornell contends, “a path to end-run established pleading standards for duty-of-prudence claims by repackaging them as prohibited transaction claims.”
Exhibit A to prove the absurdity is the prohibited transaction claim in the AT&T case. The Ninth Circuit Court of Appeals ruled in Bugielski v. AT&T Services, Inc. that when AT&T contracted with Fidelity in 2012 and 2014 to add managed account and brokerage link services to its participants, it was a prohibited transaction under ERISA because Fidelity was a “party-in-interest” to the plan. The practical effect of the ruling is that AT&T is guilty of fiduciary imprudence until it can prove itself innocent under the threat of huge liability. The unfair result in this case is exacerbated by the actual fees that plaintiffs claimed were “excessive.” AT&T has to defend the prudence of a rock-bottom $20 recordkeeping that was negotiated with the help of a first-class consultant. Not stopping there, AT&T’s fiduciaries negotiated a most favored customer clause, requiring Fidelity to lower the fee in the event any other Fidelity client received lower fees. They had negotiated Fidelity’s lowest fees across the entire country. The fees were so low that Fidelity redacted the record in the district court so that no one would find out it offered such a discount to AT&T. We chronicle the false prohibited transaction claim against AT&T in the following blogpost. Ninth Circuit: AT&T’s $20 Recordkeeping Fee Presumed Imprudent in Litigation – Encore Fiduciary
It is absurd and unfair to allow participants to allege that a contract with a most favored customer clause is a prohibited transaction. No AT&T participant is harmed with the lowest Fidelity recordkeeping fee in the country from the best recordkeeper in the country, but there is now protracted litigation over whether the $20 fee is excessive. Again, the fee is so low that Fidelity does not want anyone reading the public record to learn about it. It is absurd to allow plaintiff lawyers to challenge service-provider contracts without first showing plausibly how a participant was harmed.
KEY POINT #2: The Department of Labor’s Curious Position Lacks the “Courage of Its Convictions.”
The Department of Labor took the position in its amicus brief that the Second Circuit erred in holding that exemptions enumerated in 29 U.S.C. 1108 are incorporated in ERISA’s prohibitions against party-in-interest transactions in 29 U.S.C. 1106(a). DOL argued that exemptions in Section 1108 are defenses to liability that the defendants must set up and prove. Consistent with general rules of statutory construction and a “straightforward” reading of section 1106, DOL argued that “ERISA is most naturally read to place the burden of pleading and proving the Section 1108 exemptions on the defendant fiduciary. DOL argues that section 1106 articulates the relevant prohibitions, which Section 1108 sets up the exemptions from those prohibitions, enumerating “justifications” or “defenses” for “behavior that, standing alone, violates the statute’s prohibition. DOL argues this “straightforward reading of the statutory text reflects Congress’s aim in enacting Section 1106(a) – namely, to “supplement[] the fiduciary’s general duty of loyalty to the plan’s beneficiaries” “by categorically barring certain transactions deemed ‘likely to injure the pension plan’” through presumptively “per se prohibitions on transacting with a party in interest.”
DOL argues that the “risk that a fiduciary may be affected by conflicting loyalties in transacting with an insider is clear; there is no need to refer to an exception to understand the nature of the statute’s prohibition.” DOL continued that “even as to contracts with third-party service providers, Congress had good reason – grounded in trust law’s concern about fiduciary outsourcing – to presumptively prohibit such transactions, while allowing the fiduciary to justify a particular transaction by reference to an exemption.” DOL further argued that the Second Circuit failed to “supply any principled basis for the gerrymandered rule . . . that some, but not all, of the Section 1108 exemptions are incorporated into Section 1106(a)’s prohibitions, and that undefined subset is incorporated only insofar as plaintiff bears the burden of pleading and some burden of production, while the defendant bears the ultimate burden of persuasion.
The foregoing matches the position of the plaintiff-participants appealing the Second Circuit’s decision. The next segment of DOL’s position, however, is more curious. Cornell has argued that overturning the Second Circuit’s common-sense interpretation that rule 1106 incorporates the rule 1108 prohibited transaction exemptions would unfairly allow participant to sue any plan service provider contract, and force plan sponsors into expensive litigation discovery by pleading only a routine transaction with a third-party service provider absent incorporation of the Section 1108 exemptions into Section 1106(a). But DOL argues that “a district court has tools at its disposal to screen out meritless claims before discovery begins.” DOL asserts that for contracts for services with third-party providers – but not including contracts with plan insiders – a court may determine that a complaint that fails to plead facts suggesting that the transaction or its compensation may not be reasonable has failed to confront an “obvious alternative explanation” for the alleged conduct – that it is reasonable.” Likewise, DOL further asserts that if a fiduciary identifies and pleads facts to support the reasonable-arrangements exemption in Section 1108(b), a court may order a reply under Federal Rule of Civil Procedure 7(a) to require the plaintiff to offer additional allegations as to why those facts may not account for the challenged transaction.
DOL also asserts that the Second Circuit’s rule presents “its own administrative challenges.” Section 1108(b) enumerates 21 statutory exemptions, and DOL has adopted dozens of additional regulatory class exemptions and hundreds of individual exemptions under Section 1108(a). The Second Circuit’s rule “offers plaintiffs little guidance as to which of these exemptions they must negate in their complaints.” The Second Circuit’s interpretation apparently would require plaintiffs to sift through and identify potentially applicable exemptions before bringing claims under a provision Congress designed to be a “per se” bar. DOL claims that this “especially troubling” because the facts relevant to which Section 1108 exemption plan sponsors rely upon are “largely, or even exclusively” in the plan sponsor’s possession.
Finally, DOL took the position that the alternative pleading mechanism is moot in the Cornell case because plaintiffs adequately pleaded a prohibited transaction with sufficient facts, and “[n]o more was required” in this case. They claim as a “practical matter, it is unclear how petitioners could have alleged additional relevant facts, which may well be in respondent’s exclusive possession.” DOL ends by asserting that “[a] plaintiff’s claims should not be prematurely dismissed due to the absence of facts that it cannot obtain.”
DOL’s position is dubious on the merits. First, DOL is interpreting section 1106 as a per se bar against routine service provider contracts. As industry amicus briefs demonstrated, every modern retirement plan must use service providers to run these complex plans. But DOL claims that ERISA has a per se prohibition against these routine and necessary service provider contract. DOL takes the position that a participant can sue any plan for any service provider contract.
If the purpose of the prohibited transaction is to bar transactions likely to harm plan participants, then it should not apply to routine and necessary service provider contracts. The express purpose of the statute is to apply to insider transactions that are likely to cause harm, not arms-length, third-party contracts. DOL’s position is an absurd overreach. It turns plaintiff lawyers into regulatory auditors, giving them the right to audit any plan service contract with burdensome litigation.
Second, DOL acknowledges that absurdity of its reading that the section 1108 reasonable and necessary exemption is not an ingredient of a prohibited transaction by proposing that defendants can counter-plead an “alternative explanation” that the service provider contract was reasonable and necessary. It is form over substance. DOL’s is suggesting that courts can streamline cases by giving defendants an upfront opportunity to counter-plead that the contract fees are not excessive. This is the exact section 1108 reasonable and necessary exemption upon which nearly every service provider contract relies upon. It is further absurd because courts do not use this procedural mechanism to weed out meritless cases. It might work, but we have never seen it used. It also gives discretion to courts to allow meritless cases.
DOL’s Lack of Courage of Its Convictions: Cornell’s response brief states that the government recognizes that petitioners’ position is “intolerable.” DOL’s solution is to require a plaintiff that the service provider’s fees were unreasonable – “which is essentially respondent’s position.” Cornell’s lawyers sum it up well: “The fact that the government lacks the courage of its convictions confirms that the Second Circuit got it right.”
Finally, DOL’s position that the cursory allegations in the complaint met the plausibility standard is disappointing. DOL validates the misleading and statistically unreliable evidence that the plaintiffs’ bar uses to sue plan sponsors. The complaint alleged that the plans used a revenue-sharing model, rather than a flat per-participant fee, to pay the recordkeepers, explaining that the revenue-sharing model “can lead to excessive fees if not properly monitored and capped.” Petitioners further alleged that the plans failed to conduct a competitive bidding process for recordkeeping services, which can likewise lead to excessive fees.” Petitioners alleged that the plans paid excessive fees by explaining that paid between $115 and $200 per participant – many times higher than the $35 market benchmark. Petitioners also alleged that the plans could have used a single recordkeeper instead of two, further supporting the inference that the plans overpaid in recordkeeping fees, giving economies of scale. DOL asserts that this is enough to plausibly allege that the challenged transactions for recordkeeping services “were not obviously reasonable.” DOL claims that these prohibited transaction claims should not be “prematurely dismissed” because “it is unclear how petitioners could have alleged relevant facts” that are in Cornell’s position.
With this position, DOL continues to sanction the excessive fee litigation abuse in which plaintiff firms have filed hundreds of cases against plan sponsors with a sound fiduciary process. The answer to DOL’s question as to what more the Schlichter firm could have done more is obvious: plaintiffs could have provided a statistically credible analysis of the fees paid by other universities in the market – not an invented $35 number. The complaint alleges that average fees paid between $150 and 200 was unreasonable compared to a $35 benchmark. But there was no proof that $35 is the market benchmark. Plaintiffs made that up. In the Northwestern case, there were allegations that other universities lowered their fees, but the Cornell complaint is a bald assertion that other universities plans pay only $35 on a fixed fee, without revenue sharing or using two recordkeepers.
In any event, the claim is false. Most universities before 2015 used multiple recordkeepers because the TIAA required its annuity to be handled on its recordkeeper platform. University plans used a second recordkeeper (usually Fidelity) to lower costs for recordkeeping of non-TIAA investments. Cornell’s 403b plans were handled the same way as virtually every other plan.
But we also know the end of the story. Cornell made drastic changes to its plans before the lawsuit was filed in 2017. After the prohibited transaction claims were dismissed, the court allowed full discovery of the prudence claims. The prudence claims were the same as the prohibited transaction claims – the same claims that Cornell had an imprudent process for its overpriced revenue sharing method of recordkeeping with two recordkeepers. But the Court found no liability on the summary judgment record, finding no proof that Cornell had a deficient fiduciary process. To the contrary, the district court noted that the plan fiduciary committee had hired CAPTRUST and engaged in a deliberate and long-term fiduciary process that resulted in drastic changes to plan. Cornell defeated the fiduciary imprudence claims because it showed a pattern of fiduciary process improvements.
More egregiously, the fiduciary breach claims were based on fake, junk science expert testimony. This is the same unreliable evidence that would apply to the prohibited transaction claims if resurrected. Plaintiffs proffered the same expert witnesses that appear for plaintiffs in many cases: Al Otto and Ty Minnich. The district court noted that both declared that in their “experience” – and the court used quotations around that term – a reasonable recordkeeping rate for the plans would have been $35 to $40 per participant. “But neither offered any cognizable methodology in support of their conclusions, instead referencing their knowledge of the relevant industry and a few examples of other university plans that paid lower fees, though without explaining how these putative comparisons were selected.” Apart from the unsupported expert testimony that the district court excluded, the only other evidence was what the Court disparaged as “scattered numbers” of plan participants, assets and recordkeeping fees for a few plans from CAPTRUST and TIAA. For example, plaintiffs had TIAA pricing data showing that the Cornell plans paid higher than the 25th percentile of TIAA’s largest 200 clients; and CAPTRUST data identifying a “handful of plans” with over 10,000 participants that paid lower recordkeeping fees.
The district court threw out plaintiff’s weak expert testimony as unreliable junk science. After years of discovery, and prosecuting a dozen other cases against jumbo university plans, the Schlichter firm still was unable to assemble a reliable, national survey of what large university plans actually paid for recordkeeping prior to 2016. The reason?: because the Cornell plan paid what most other university plans paid during the same time period. There was never any proof that the twenty-plus university plans sued for fiduciary imprudence paid more than most other similarly sized 403b plans. Schlichter law firm lawyers may not like the recordkeeping arrangements that existed from 2010-2015 for large university plans, but this was industry standard. Again, we have some sympathy for their position on revenue sharing and even legacy fee amounts, but the reality is that these obsolete revenue sharing arrangements are no longer the industry standard. Cornell and other university plans made significant changes as the market changed. They followed fiduciary best practices to make wholesale changes to the plan.
The DOL’s position would allow plaintiff lawyers to challenge nearly every plan and second-guess their fiduciary decisions. It would presume every service provider contract is per se flawed, and require plan sponsors to defend their routine and necessary contracts in litigation. Even if the litigation is somehow streamlined – and we have seen no proof that district courts have the ability or desire to short-circuit complex cases – it is unfair to plan sponsors to presume fiduciary imprudence for the mere act of running the plan. It would allow plaintiff lawyers to repackage fiduciary-imprudence claims as prohibited transactions in order to avoid pleading plausible proof that the fees were actually excessive. It would encourage more fiduciary class action litigation abuse. DOL’s position is unfair to plan sponsors, and not the balance that ERISA intended. ERISA was not intended to give plaintiff lawyers the right to sue without proof of wrongdoing.
KEY POINT #3: The Schlichter Firm Claims the Predictions of an Avalanche of Litigation is Fearmongering. Who is Right?
Cornell and other industry amici, including our firm, contend that overturning the Second Court’s common-sense reading that prohibited transaction claims would lead to an “avalanche of litigation.” Cornell argued that it would be “remarkably easy for a plaintiff to plead a prohibited transaction claim under section 1106(a)(1)(C), because ERISA generally requires plans to disclose service-provider transactions.” “A plaintiff could file a lawsuit and proceed to discovery merely by alleging the fact of a transaction, without plausibly pleading any wrongdoing.” Since plaintiff’s position is that they could sue without alleging excessive fees, their position “would not result in more meritorious excessive-fee litigation – just more litigation, period.” The predictable result would be meritless lawsuits filed solely to “extort settlements.”
In its reply brief, plaintiffs argue that this is “fearmongering.” They claim that “we’ve heard this story before. Defendants have trotted out the flood-of-litigation specter in nearly every ERISA case before this Court over the past decade.” Plaintiffs argue “there has been no flood.” They even cite to Encore Fiduciary statistics to assert that the recent frequency of case filings is not excessive. Defendants argue that the hysteria over the ability of plaintiffs to sue every service provider contract is “unfounded” because “[j]ust because a party can be sued does not mean it will be.” They claim that there are “many guardrails-sanctions, fee-shifting, standing-that counsel against plaintiffs filing lawsuits just to file them. Finally, they assert that the Eighth Circuit has had a liberal pleading standard for prohibited transaction claims for fifteen years since the Braden v. Walmart Stores case, and the circuit has not been overrun by section 1106 prohibited transaction cases.
We believe that the number of cases is excessive when put into perspective. As we have explained before, approximately 485 out of 1,350, or 36%, of large plans in America have been sued for alleged excessive fees in the last eight years. If you just focus on plans with assets over $1b or more, more than fifty percent of these jumbo plans have now been sued for purported excess fees. Any cynic of the plaintiffs’ bar would discern that many plans are being unfairly sued, because 35% of America’s large retirement plans, or over 50% of jumbo plans, cannot possibly have excessive fees. The law of averages would dictate otherwise, assuming that plan fees are properly compared. These lawsuits are not about excess retirement fees, but a business model in which ERISA fiduciary liability is being exploited for financial gain.
But even if the number of filings was not excessive, the key indicator of litigation abuse is that most of the cases being filed are against plans with a sound fiduciary practice. Many of these cases are meritless. The number of cases being filed are too many when meritless cases are being filed. Whereas the industry groups rightly contended that the Cornell ruling could lead to even more litigation abuse, Encore Fiduciary’s amicus brief provided concrete examples of litigation abuse in excessive fee cases. Talk is cheap. We provided examples as to how ERISA has been abused to extract unjustified excessive fee settlements. We showed examples of misleading fee allegations in which complaints alleged >$500 recordkeeping fees when participants were given fee disclosures showing fees as low as $32. We then gave examples of cases in which complaints compare these inflated fees to misleading and unreliable benchmarks. In many cases, plaintiffs filed complaints alleging that $200m smaller plans only paid $5 for recordkeeping fees, intentionally distorting the data from a national survey of small plans. The true recordkeeping fees when revenue sharing is included was over $600. We concluded with the example from the PNC case in which the courts excluded plaintiff’s junk science expert testimony, like in the Cornell case, because the so-called experts had invented the “reasonable” amount based on his gut feel from his general experience. These many examples show how plaintiff law file abusive litigation with no legitimate proof of wrongdoing when they file the cases. We cannot trust their lack of prosecutorial discretion. And we cannot rely on sanctions to deter meritless cases, because the modern defense firms are loathe to seeks sanctions.
The Schlichter firm can call the predictions of increased litigation to be fearmongering. But we do not need an increase in filing to cry fowl. The current frequency of litigation is too high as long as plan sponsors with sound fiduciary processes continue to be sued.
KEY POINT #4: Has excessive fee litigation dramatically brought down plan fees and protected participant retirement savings, or has it mostly allowed plaintiff law firms to collect huge fees?
The Schlichter law firm disputes Cornell’s prediction that its theory would result in “higher costs” for plan members. They argue instead that “case law and scholarship buck that assertion, finding instead that ‘excessive fee litigation’ has ‘dramatically brought down fees’ and ‘protect[ed] participants’ retirement savings.”
Let’s start with the supposed “scholarship” that he cites. It is a forthcoming law review article to published in the George Mason Law Review, Lauren K. Valastro, How Misapplying Twombly Erodes Retirement Funds, 32 Geo. Mason L Rev. (forthcoming 2025). The article is akin to the junk science of the experts the Schlichter firm used in the Cornell case. The article argues that the current pleading standard in the federal courts exceeds the plausibility standard. She claims that federal courts are barring the right of participants to challenge the “junk fees” and “fees on top of fees” in retirement plans by using an impossible probability standard. That is so wrong. She is correct that courts apply an inconsistent pleading standards. She compares the Sixth Circuit’s CommonSpirit decision to the Omnicom decision in the Second Circuit denying a motion to dismiss. But the CommonSpirit pleading standard is not an impossible probability standard. Even her statistics that 45% of cases are dismissed does not show that plaintiffs are barred from addressing wrongdoing. She fails to cite the nearly $2B in settlements since 2016, which debunk her argument that participants are barred from seeking excessive fee fiduciary-breach damages.
The core flaw in Professor Valastro’s law review article is that she claims that these cases are about “junk fees” of 2%, which reduces a participant’s retirement by one-third. But she does not analyze the fees alleged in any single case. We would agree with Professor Valastro that a plan with a two-percent junk fee would be excessive. But she fails to identify a single case with a two percent junk fee. There are a few cases with high fees, but over 95% of the plans being sued have all-in fees – recordkeeping and investment fees – under 50 basis points. A significant number of the cases filed in the last five years have all-in fees of under 25 basis points, some with under 15 bps. Companies like U.S. Bancorp, Humana, and Whole Foods, and many others, have been sued with recordkeeping fees of less than $30 per participant at an under 5 basis point percentage. Many of the plans being sued have default investment options in index target-date funds at under 8 bps. These plans being sued for excessive fees have low overall fees. Again, what case has a two percent fee structure?
In sum, the so-called scholarship relied upon by the Schlichter firm is based on a false premise that the current slate of fiduciary-breach cases are against plans with egregious fees. They are not. We have proved that over and over. The George Mason Law Review should raise its publication standards.
Next, the Schlichter firm argues that excessive fee litigation has reduced fees for participants and is overall beneficial. Most plans have already lowered fees or switched to lower-cost investments before the lawsuits have been filed. Why? Because the entire industry has experienced 15 years of competition and fee compression. There may have been a small amount of fee reductions from the initial 2006-2015 wave of litigation brought by the Schlichter law firm as he highlighted fiduciary best practices. But any fee compression in the last ten years has less to do with litigation than a fiercely competitive retirement services market.
Instead, as the current litigation focuses on meritless challenges against well-run plans, the litigation has caused plan sponsors to avoid any creativity or new ideas in retirement plans, and has caused plan sponsors to choose from a smaller handful of common investments. This only concentrates the investments into a smaller number of mega-firms. Participants lose potential innovations as plan sponsors must focus on risk avoidance. We are headed to a 401k world in which every plan has the same generic Vanguard or State Street index funds. There is nothing wrong with these investments, but any claim by Jerry Schlichter and the copycat plaintiff-lawyer minions that they helps plan participants is widely overstated, and just plain wrong.
The final rebuttal to Schlichter’s claim of fearmongering is how little plan participants receive in the fiduciary-breach settlements. Fiduciary Decisions has analyzed that participants receive an average of $198 in settlements. That is $28 per year. That will not even buy a daily ticket to Disneyland in retirement. Our analysis of 2024 settlements reveals that participants received as little as $5 in settlements, but never more than $880, with an average now below $100 per settlement. By contrast, plaintiff lawyers took home over $70 million dollars last year. I rest my case.
FINAL THOUGHTS
The Cornell case represents a turning point: Opportunistic litigation manufactured by plaintiff lawyers has turned into a form of legalized extortion, with all pretenses removed that they are rectifying wrongful acts by plan fiduciaries. Plaintiff lawyers want an unfettered right to sue any plan that enters into a third-party service contract, which is every plan in America. Accepting this absurd position would turn DOL’s regulatory authority over to America’s plaintiff lawyers. These are the same law firms who have filed hundreds of purported excessive fee cases against conscientious plan sponsors who follow best fiduciary practices. There is no prosecutorial discretion in the current slate of cases, as many good plans are indiscriminately sued.
With the American Airlines decision finding AA fiduciaries to have breached their duty of loyalty for hiring BlackRock, even though they deliberately avoided BlackRock’s ESG investments, we have competition for the most absurd ERISA case. But the bold stance of the Schlichter firm in the Cornell case is the most absurd position by the plaintiff bar to date. They want to conduct litigation audits on any plan sponsor they want to target. The Supreme Court needs to stop this farce by reinforcing a plausibility pleading standard for all fiduciary-breach litigation.
