Jerome Schlichter, the architect of the modern excessive fee ERISA class action lawsuit, has a remarkable track record of unifying both liberal and conservative Supreme Court judges. In a hat-trick of fiduciary-breach cases against Intel, Northwestern University, and now Cornell University, his law firm has now won three unanimous decisions in the United States Supreme Court. No Supreme Court justice has ever ruled against him or his novel theories of ERISA fiduciary liability.
Nevertheless, Schlichter’s Supreme Court case against Cornell has taken excessive fee fiduciary-breach litigation to the point of absurdity. The Court sanctioned Schlichter’s position that an ERISA prohibited transaction claim can be filed with bare-bones allegations that an employee benefit plan entered into a service provider contract – something that is essential to run every modern plan. Unlike the long-running war over what level of proof is necessary to file a breach-of-fiduciary duty imprudence claim, the Court ruled that a prohibited transaction claim does not require any proof of wrongdoing. In other words, you can file a prohibited transaction claim alleging excessive fees without any proof that the fees were excessive or based on an imprudent fiduciary process.
The irony is that the ruling comes in a case in which the Schlichter firm already failed to prove its excessive fee claims, with the district court rejecting his expert fee testimony as unreliable and unpersuasive. But no matter, now all excessive fee lawsuits, including the new genre of excessive fee lawsuits against health plans, will be recast as prohibited transaction claims to avoid a motion to dismiss.
This distorts ERISA beyond any possible legislative intent. Justice Alito warned in his concurring opinion just how easy it is to sue plan sponsors by alleging that any essential service provider contract is a prohibited transaction: “The upshot is that all a plaintiff must do in order to file a complaint that will get by a motion to dismiss . . . is to allege that the administrator did something that, as a practical matter, it is bound to do.” The unanimous decision highlights the growing problem that ERISA has been weaponized to turn voluntary employee benefit plans into liability traps.
We have not reached the tipping point of plan sponsors ceasing to sponsor employee benefit plans. Nor have fiduciary liability insurers stopped providing quality fiduciary insurance to protect plan fiduciaries. But in a world in which plan sponsors who follow all best fiduciary best practices and processes can be sued without any proof of wrongdoing, there is no incentive for any company to sponsor an employee benefit plan or expand benefit offerings to employees. Likewise, fiduciary insurers can no longer rationally charge lower premiums to best-in-class plans, because even good plans can be sued after the Cornell decision.
No one can predict when the system will break due to relentless litigation. But the warning signs are clear. The Cornell decision is another seed of destruction of the voluntary employee benefit plan system.
The following are five thoughts from the Cornell decision.
KEY POINT #1: The Court considers its decision “obvious,” but it opens every plan sponsor who must outsource plan administration to abusive class action litigation manufactured by an opportunistic ERISA plaintiffs’ bar.
ERISA’s prohibited transaction provision in Section 1106(a)(1) (1) states that, “[e]xcept as provided in section 1108 [exemptions],” a fiduciary “shall not cause the plan to engage” in certain transactions with a “party in interest.” The Cornell case was about whether the precursor language required plaintiffs to plead the elements of the prohibited transaction exemptions to plead a plausible prohibited transaction claim – in other words, whether plaintiffs need to provide plausible proof in the complaint that the alleged imprudent service provider contract was not necessary or involved unreasonable fees. The Supreme Court ruled that the precursor language of ‘except as provided” in the section 1108 prohibited transaction exemptions constitutes affirmative defenses to a prohibited transaction claim. This means that the section 1108 exemption for “necessary and reasonable” service provider contracts, which are used to justify nearly every contract, are not part of the elements of a prohibited transaction claim.
The Court held that plaintiffs under section 1106(a)(1)(C) need “only plausibly allege: that the (1) plan engaged in a service provider transaction; (2) for goods or services; and (3) between the plan and a part-in-interest.” The “reasonable and necessary” exemptions in section 1108 are not part of the pleading requirement. Participants can challenge a service provider contract without any upfront proof that the contract was based on fiduciary imprudence or wrongdoing. Hopefully a “party-in-interest” only applies to pre-existing service providers [and thus participants can only sue on modifications or changes to a contract], but that is not clear from the opinion.
To the Court, the issue was simple and obvious: when a statute has exemptions laid out apart from the prohibitions, the exemptions constitute affirmative defenses, and not elements of the claim. Even the three concurring conservative justices [Alito, Thomas and Kavanaugh] stated that the decision was a “straightforward application of established rules” of statutory construction. It took fifty years to get this opinion from a 1974 statute, but somehow the decision was obvious to all nine justices.
This means that a claim of fiduciary imprudence for excessive plan fees can be cast as a prohibited transaction without any proof that the contract was not necessary or unreasonable, i.e. excessive. According to the Court, the statute sets out “per se prohibitions,” and thus it is unfair to put the “onus on plaintiffs to plead and disprove any potentially relevant” section 1108 exemptions. Every service provider contract – or at least any contract with an existing service provider to the plan – can be challenged as per se prohibited. You deal with prohibited transaction exemption after the case is filed. In other words, every plan sponsor who outsources to a service provider is considered guilty until proven innocent.
The Court held that this basic pleading standard is no big deal, because “if a defendant establishes that a 1108 exemption applies, they cannot be held liable.” But at the pleading stage, it is enough to allege the bare-bones elements that a plan entered into a service provider contract with a party-in-interest.
The Court Did Not Consider ERISA’s Legislative Intent: The unanimous decision was cast in the opinion as patently obvious. Cornell is supposedly foolish for appealing such a self-evident statutory application. But the Court did not analyze what Congress intended in the ERISA prohibited transaction statute. Did Congress in 1974 when ERISA was enacted intend for plaintiffs to have the presumptive right to challenge any plan service contract – something that Justice Alito called “nuts” in the oral argument? The Court did not ask this obvious question. If it had – and courts used to consider legislative intent in analyzing statutes – it would have held that the statutory construction adopted by the Supreme Court is ludicrous.
We now have open season on plan sponsors, as plaintiffs can sue with no pleading of wrongdoing. This allows litigation fishing expeditions to leverage settlements. Fiduciary imprudence cases will now be filed as prohibited transactions to avoid a motion to dismiss.
Just look at the AT&T prohibited transaction case in the Ninth Circuit. Plaintiffs are challenging a rock-bottom $20 recordkeeping fee in a contract with a most-favored customer clause. AT&T is spending millions of dollars defending a fiduciary-breach lawsuit when it negotiated Fidelity’s lowest national rate for recordkeeping. A prudent plan sponsor who negotiated Fidelity’s lowest rate is being accused of fiduciary imprudence, and forced to spend millions to defend a patently prudent fiduciary process. The AT&T case demonstrates the absurdity of the prohibited transaction lawsuits now greenlighted and sanctioned by the Supreme Court.
KEY POINT #2: The Predictions of an avalanche of litigation misses the point that we already have a high volume of meritless cases. The impact of the Cornell decision is that plan sponsors will be forced to settle meritless cases to avoid protracted litigation and expense, as the ability to dismiss abusive lawsuits is eliminated.
Amicus briefs on behalf of plan sponsors warned that the Cornell ruling will lead to an avalanche of litigation. Encore Fiduciary’s amicus brief raised a more nuanced point that we are already facing a tsunami of ERISA class action litigation. This opinion sanctions that high volume of litigation. But even more importantly, the key point is that the Cornell decision sanctions that continuation of fiduciary-breach litigation against plan sponsors with best-in-class fiduciary practices. The system is allowing abusive litigation because quality plan sponsors are being sued. And now that even more cases will survive a motion to dismiss, plaintiff lawyers have more incentive to file even more frivolous and meritless lawsuits against plan sponsors who follow a prudent fiduciary process.
Encore counted 23 excessive fee lawsuits in the first quarter of 2025, not counting the new tobacco surcharge and ESOP lawsuits. We are on pace for over 90 excessive fee cases this year, which continues a near record pace since the surge in filings in the second half of last year. The ramification of the Cornell case is less about an increase of lawsuits, which are already too high, but more about the viability of these lawsuits.
Plaintiff lawyers now have a roadmap to recast their imprudence claims of excessive plan administration and investment fees as prohibited transaction claims. They can avoid pleading any wrongdoing in rule 404 imprudence claims by recasting these same excessive fee claims as prohibited transactions. They get an automatic golden ticket into discovery, and the ability to leverage settlements given the high cost of defense.
KEY POINT #3: Any solace in the ability of courts to streamline fiduciary-breach litigation is wishful thinking.
Justice Sotomayor acknowledged the “serious concerns” that future plaintiffs can bring “barebones” prohibited transaction lawsuits, but stated that “district courts can use existing tools at their disposal to screen out meritless claims before discovery.” She stated that Federal Rules of Civil Procedure 7 empowers district judges to “insist that the plaintiff” file a reply “putting forward specific, nonconclusory factual allegations” showing the exemption does not apply. Consequently, “[l]ower courts can dismiss the suits of those plaintiffs who cannot plausibly do so.” In addition, district courts retain discretionary authority to expedite or limit discovery as necessary to mitigate unnecessary costs. Finally, “Rule 11 may permit a district court to impose sanctions against” plaintiff lawyers. District courts have the “additional tool” or “cost shifting” to plaintiffs. Justice Sotomayor thus claims that “district courts therefore have . . . a variety of means to address” the concerns of litigation abuse.
Anyone with experience in the modern federal court system understands that these are makeweight arguments. We have never seen Rule 7 used in any case. The DOL’s amicus brief was unfair to plan sponsors by suggesting the federal district judges can manage dockets efficiently. Of course they can. But they don’t. These judges have busy dockets. And in our experience, they do not prioritize complex ERISA cases. They do not look to ways to streamline cases. Quite the opposite, most judges at the motion to dismiss stage take the easy way out, and kick the can down the road by denying preliminary motions.
As for sanctions to deter meritless cases, defense law firms rarely seek Rule 11 sanctions or ask for fee shifting. Trust us, we have begged defense lawyers to seek sanctions for filing bogus cases. But they will not do it. There is some kind of honor code followed by the defense bar in which they refuse to seek sanctions against plaintiff lawyers. Rule 11 is as worthless as Rule 7 in the potential to streamline run-away litigation.
Any hope that district judges will streamline ERISA cases is wishful thinking. In the meantime, plaintiff lawyers now have an easier way to plead excessive fee cases. This means more cases with unfair leverage to extract settlements against America’s plan sponsors.
KEY POINT #4: How will this unfair decision affect the fiduciary insurance market, or plan sponsors willing to continue sponsoring quality employee benefit plans?
We have been asked to opine as to how this case will impact the fiduciary insurance market. The Cornell decision makes it harder to underwrite fiduciary insurance. It is increasingly impossible to underwrite fiduciary insurance when even good plans with good process can be sued. Encore’s fiduciary underwriting model is to provide lower premiums and better scope of coverage, including lower retentions, for plans with low fee plan administration and investments. We give better insurance terms to plan sponsors who follow a better fiduciary process. But the Cornell decision and recent decisions that allow fiduciary-breach cases against plan sponsors with good fiduciary processes – allowing fishing expeditions against good plans – upends our underwriting model. Our underwriting model doesn’t work when good plans have an equal chance of being sued as plans with higher fees. We assume that the underwriting models of other fiduciary carriers also no longer work.
It is easy to predict, therefore, that fiduciary carriers will raise premiums, change terms adversely to plan sponsors, and that fiduciary insurance will be harder to procure. This is what happened in the tipping point in 2020. But fiduciary insurance is not a rational market. The ERISA class action litigation surge started in 2016, yet it took over four years before fiduciary insurers made drastic changes. The insurance market should react to changing litigation risk. Nevertheless, the honest reality is that fiduciary insurance currently is in a highly competitive market. Fiduciary carriers are offering reasonable premiums, and even some discounts. The discounts defy the reality of the renewed surge in ERISA class action litigation. But because of the falling rates for D&O and other management liability insurance, which is now in its third year of a soft market, insurance companies are aggressive and attempting to stem premium losses. It has caused a protracted soft market, even though it is irrational. We believe that fiduciary insurers are writing at a loss, and are in denial about the higher fiduciary risk. Nevertheless, plan sponsors are able to obtain excellent fiduciary terms in the current market. Plan sponsors are benefiting from an irrational fiduciary insurance market.
But that doesn’t mean the favorable insurance market will last. The soft market cycle can end at any time, just like it did abruptly in 2020 when the leading insurance carrier instituted $15m excessive fee retentions for jumbo plans. It is difficult to predict when the market will change to reflect the changing risk environment. But we know it will. It is just a matter of time before fiduciary carriers make drastic changes.
The better question is whether plan sponsors will stop offering benefit plans now that they have turned into litigation liability traps. There is no rational reason to sponsor employee benefit plans when courts allow prudent sponsors to be sued in meritless litigation. The rational plan sponsor would stop offering employee benefit plans. This was predicted in the amicus briefs from plan sponsor advocates before the Supreme Court.
But again, like the fiduciary insurance market, the marketplace for retirement plans is not always rational. We have not reached the tipping point in which plan sponsors pull back their voluntary benefits. No one can predict when the retirement plan market will change. Just like we know that the federal government has an unsustainable fiscal problem with $35 billion+ deficits. So far, we have not suffered the effects of runaway deficits. But at some point, it will be a problem – we just don’t know when.
What we can state with certainty is that the unfair Cornell decision plants another seed in the potential for significant changes in the retirement plans. The relentless and abusive litigation threatens the future of the voluntary employee benefit system. It is just a matter of time before companies offer employees a fixed amount of money, and tell them to get their own health and retirement benefits. But by then, it will be too late. And that is why we need a legislative fix.
KEY POINT #5: Given that the Schlichter firm was unable to prove that the Cornell plan fees were excessive in the underlying litigation, the case proves why it is wrong and prejudicial to allow prohibited transaction claims without upfront proof of wrongdoing.
The key claim in the Cornell excessive fee complaint was that Cornell participants were paying up to $200 in recordkeeping fees when the prudent and more reasonable amount would have been $35 per participant. The Schlichter firm alleged this in over fifteen cases. They claimed that all large universities should have negotiated with TIAA and Fidelity for a $35 fixed fee recordkeeping by leveraging the jumbo size of the plan. There were other excessive fee and investment imprudence claims, but this was the core claim of these lawsuits. After nine years of excessive fee litigation against university plans, we now have enough data to evaluate whether the Schlichter firm uncovered actual fiduciary imprudence by university fiduciaries. We now can evaluate whether these cases were legitimate. Despite the huge fanfare, the few cases litigated to conclusion have proven that the Schlichter firm had no legitimate basis to allege wide-scale fiduciary imprudence by university plan fiduciaries.
What proof did the Schlichter firm have that the proper recordkeeping benchmark was $35 for large plan sponsors prior to 2016? After full discovery in the Yale, Boston College, and Cornell cases, the answer is none. The Schlichter firm and other plaintiff firms that filed over twenty-five cases against large university plans never had any proof that the prudent recordkeeping fee was $35. They made the number up. We know this because the plaintiffs’ experts in the Yale, Boston College, and Cornell cases were unable to produce even a single university pre-2016 that had a recordkeeping fee at $35 or lower. They filed these cases under false pretenses.
We also learned in extensive discovery in the Cornell and other cases that many universities made significant changes to their plans between 2013 and 2020, reducing fees substantially as the market for recordkeeping of 403b plans changes and fees compressed during this time period. Cornell made drastic changes to its plan administration and recordkeeping with the help of CAPTRUST as its investment manager. Yale proved in its defense that it also made investment and fee changes, including consolidating to one recordkeeper. Boston College decided not to consolidate to one recordkeeper, but it had a thoughtful and deliberate fiduciary process, and made significant plan changes over time that benefited plan participants.
Most universities caved to the litigation pressure and settled for enormous amounts. But the universities like Cornell who fought back showed that the litigation narrative of fiduciaries “asleep at the wheel” was false and prejudicial. They might not have made plan changes as quickly as Jerome Schlichter wanted. But the evidentiary records in the Cornell, Yale and Boston College cases showed that most universities hired good investment managers, and made calculated and conscientious fiduciary decisions. They engaged in a prudent fiduciary process under which plan investment and recordkeeping fees came down dramatically in the ten years from 2013 to the present.
Why does this matter? Because it shows the prejudice of allowing excessive fee and prohibited transaction cases challenging plan fees and investments without upfront proof of wrongdoing. Schlichter and other firms secured over $140m in settlements – with over $45 million in attorney fees – in the fifteen university cases that settled. But the few cases that were litigated and developed an evidentiary record demonstrated that these excessive fee cases were filed upon a false premise of fiduciary imprudence. The junk expert reports in these cases unmasked the truth that the plaintiff law firms filed the case with fake $35 benchmarks and a fake narrative that plan fiduciaries were asleep at the wheel in allowing run-away fees by service providers like TIAA and Fidelity.
The cases that were tried to judgment turned out to be false. There may have been some universities that were legitimately asleep at the wheel, but most universities were sued unfairly. It caused significant prejudice. Jerome Schlichter became famous for creating a new field of class action lawsuits. He certainly became rich. But any observant student of the litigation history would learn that the lawsuits were based on a false and misleading premise. And they were based on flimsy evidence that fell apart upon real examination.
The track record of these university cases is why it is unfair and prejudicial to allow fiduciary malpractice cases that have no upfront evidence to back them up. It is why the Cornell decision allowing bare-bones prohibited transaction claims is unfair and prejudicial to plan sponsors. We fully realize that it might be impossible to get sixty senators to pass any legislative fix in Congress. But this is a cause that should unite both sides of the aisle. We must stop the litigation abuse before plan sponsors wise up and stop offering quality employee benefit plans.
