Cunningham v. Cornell University, 86 F.4th 961

Background

Plaintiffs are participants in Cornell’s two 403(b) defined‑contribution plans who sued Cornell, the plan fiduciaries, and CAPTRUST alleging ERISA fiduciary breaches for (a) paying excessive recordkeeping fees to TIAA and Fidelity, (b) retaining underperforming investments, and (c) offering higher‑cost retail mutual‑fund share classes instead of lower‑cost institutional shares.
Cornell formed an RPOC and retained CAPTRUST as investment advisor; TIAA and Fidelity acted as recordkeepers paid via revenue sharing; the plans offered ~300 investment options during the class period (2010–2016).
At the motion‑to‑dismiss stage the district court dismissed several claims but allowed claims concerning recordkeeping fees, certain retained investments, and a share‑class theory to proceed; many other allegations were dismissed as insufficiently pleaded.
On summary judgment the district court found triable issues as to breach on some claims but granted judgment for defendants because plaintiffs failed to prove loss for the recordkeeping claim, and otherwise failed to show imprudence for the investment‑retention and most share‑class theories; one share‑class subclaim later settled.
The Second Circuit affirmed in full. It (1) clarified pleading standards for §1106(a)(1)(C) prohibited‑transaction claims (incorporating §1108(b)(2)(A) limits), (2) upheld the district court’s approach to separately evaluating multiple theories within a count, (3) affirmed summary judgment on the recordkeeping claim for failure to show loss (plaintiffs’ experts excluded as unreliable), and (4) affirmed summary judgment on the investment‑retention and most share‑class claims (evidence showed reasonable process and that Cornell had attempted to obtain institutional shares).

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether payments to recordkeepers violated 29 U.S.C. §1106(a)(1)(C) (prohibited transaction)	Cornell caused prohibited transactions by paying TIAA and Fidelity excessive/unreasonable compensation to provide recordkeeping services	Routine payments for necessary plan services are exempt under §1108(b)(2)(A); plaintiffs failed to plead that services were unnecessary or compensation unreasonable	To state a §1106(a)(1)(C) claim plaintiff must plausibly allege the services were unnecessary or compensation unreasonable (incorporating §1108(b)(2)(A)); plaintiffs failed to do so; dismissal affirmed
Whether the district court improperly “parsed” Count V at motion to dismiss	Parsing prevented holistic consideration of circumstantial evidence of a flawed process	Court may plead‑by‑theory and must evaluate separate theories alleged in one count individually	District court permissibly evaluated the distinct theories in Count V separately; no error
Whether plaintiffs proved loss for the recordkeeping‑fees breach (Count III)	Evidence (fee data and expert testimony) shows imprudent fees and establishes loss or at least a genuine dispute	Plaintiffs failed to present a suitable benchmark/prudent alternative or admissible expert proof of damages; burden shifts to defendants once plaintiffs show imprudence and an alternative	Summary judgment affirmed: plaintiffs failed to prove loss; experts excluded as unreliable; alternative data insufficient to show damages
Whether defendants breached the duty of prudence by retaining underperforming funds and failing to adopt institutional share classes (Count V)	Defendants failed to monitor and remove underperforming investments and delayed switching to lower‑cost institutional shares	Defendants employed reasonable processes over time, engaged CAPTRUST, considered disruption to participants, and tried to negotiate institutional shares with TIAA (initially rebuffed)	Summary judgment affirmed: no genuine dispute of imprudence; institutional‑share claim failed because Cornell attempted the transition and could not force TIAA earlier

Key Cases Cited

Tibble v. Edison Int’l, 575 U.S. 523 (2015) (ERISA trustees must conduct regular, attentive review of plan investments)
Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238 (2000) (§1106 supplements fiduciary duty of loyalty; structure of prohibited transactions)
Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) (unreasonable fees may give rise to inference of conflicted conduct in trust‑law context)
Hughes v. Northwestern Univ., 142 S. Ct. 737 (2022) (fiduciaries must remove imprudent investments within a reasonable time; context‑specific prudence inquiry)
Lowen v. Tower Asset Mgmt., Inc., 829 F.2d 1209 (2d Cir. 1987) (fiduciary bears ultimate burden to prove exemptions apply under ERISA; trust‑law allocation of burdens)
Sweda v. Univ. of Pa., 923 F.3d 320 (3d Cir. 2019) (interpreting §1106(a) to require allegations suggestive of intent to benefit a party in interest)
Ramos v. Banner Health, 1 F.4th 769 (10th Cir. 2021) (limits on §1106(a) pleading; requiring certain prior relationship to make provider a party in interest)
Albert v. Oshkosh Corp., 47 F.4th 570 (7th Cir. 2022) (narrowing §1106(a) to transactions that look like self‑dealing rather than routine payments)
Braden v. Wal‑Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009) (earlier decision reading §1106(a)(1)(C) broadly and treating §1108 exemptions as affirmative defenses)
Lockheed Corp. v. Spink, 517 U.S. 882 (1996) (contextual discussion of plan‑asset uses and harms addressed by §1106)
United States v. Cook, 84 U.S. (17 Wall.) 168 (1872) (when exception is integral to defining an offense, pleadings must account for it)