Key Takeaways
- When an ERISA governed retirement plan engages and pays service providers, such as advisors and recordkeepers, it commits a prohibited transaction.
- However, if the plan fiduciaries satisfy the conditions of an exemption (which, in this case, would be the 408(b)(2) statutory exemption), the prohibited transaction is exempt, that is, it becomes permissible.
- If the conditions of the exemption (e.g., reasonable arrangement and reasonable compensation) are not satisfied, the plan fiduciaries have engaged in a nonexempt prohibited transaction that can be the basis for an adverse finding in a DOL investigation or the basis for a lawsuit.
- The recent Supreme Court decision in Cunningham v. Cornell held that the burden of proof for determining whether the conditions of 408(b)(2) were satisfied are on the plan fiduciaries, meaning that plaintiffs’ attorneys can simply allege that the fiduciaries hired service providers and then the fiduciaries must prove that they satisfied the conditions of the exemption.
In an ERISA fiduciary breach lawsuit, plaintiffs’ attorneys must allege actions by fiduciaries that violated the law’s fiduciary standards and then, at trial, they must prove those facts. However, the Supreme Court’s decision in Cunningham v. Cornell University turns that process on its head by holding that the burden of proof for an exemption from prohibited transactions is not on the plaintiffs, but instead is on the defendants—the plan fiduciaries. As a result, lawsuits that allege prohibited transactions are more likely to proceed to trial and perhaps increase the risk of loss for plan fiduciaries. More on this later in the article.
