Supreme Court Allows Cornell Employees to Pursue Class Action Over Retirement Plan Mismanagement

On April 17, a significant decision emerged from the Supreme Court, holding that Cornell University employees could proceed with a class action lawsuit against their employer for allegedly mismanaging retirement plans and imposing excessive fees. This ruling, which was unanimous with a 9–0 vote, comes after lower courts had previously dismissed the case, arguing that the employees lacked sufficient evidence to support their claims.

The case, known as Cunningham v. Cornell University, stems from complaints by approximately 30,000 employees regarding the university’s defined contribution retirement plans, which manage a substantial $3.3 billion in funds. The crux of the employees’ grievance centers on the high recordkeeping fees charged from 2010 to 2016. They argue that these fees were inflated due to an overabundance of investment options and an excessive number of recordkeepers involved, which ultimately diluted the effectiveness and affordability of the retirement plans.

Initially, the employees took their case to federal district court in New York in 2017, where they confronted a legal landscape governed by the Employee Retirement Income Security Act (ERISA). This federal law is designed to protect the interests of employees in private retirement and health plans, establishing minimum standards for such plans. However, the district court dismissed the lawsuit, asserting that the employees had failed to provide adequate evidence to show that the fees were unreasonable. The Second Circuit Court upheld this dismissal in November 2023, citing a lack of substantiation for the employees’ claims.

The Supreme Court’s deliberation on January 22 brought clarity to the legal standards involved in such cases. The oral arguments revealed a tension between protecting employees’ rights and concerns about potential overreach in litigation. For instance, Justice Brett Kavanaugh raised apprehensions that allowing plaintiffs to claim improper transactions could lead to inflated costs for employers and encourage frivolous lawsuits—a concern echoed by industry experts who warn of a potential surge in legal actions against universities relying on third-party service providers.

Attorney Xiao Wang, representing the employees, articulated that the investment providers, Fidelity and TIAA, had bundled recordkeeping services with their own investment products, which led to higher expense ratios and, consequently, greater recordkeeping fees. This bundling practice was argued to be detrimental to employees, highlighting a conflict of interest where fiduciaries may prioritize their products over the best interests of the plan participants.

Justice Sonia Sotomayor, in her opinion, underscored that the plaintiffs have a right to challenge the fiduciaries’ actions under ERISA. She clarified that plaintiffs need only to plausibly allege that a fiduciary engaged in a prohibited transaction—there is no requirement for them to prove that certain exemptions, outlined in Section 1108 of ERISA, do not apply. This ruling shifts the burden of proof onto the fiduciaries, requiring them to demonstrate that their actions were within the bounds of reasonable compensation and not in violation of the law.

The significance of this ruling extends beyond just Cornell University. It signals a potential shift in how fiduciaries manage retirement plans and could embolden employees across various institutions to scrutinize their retirement options more closely. As the case returns to the Second Circuit for further proceedings, it sets a precedent that could reshape fiduciary responsibilities and the legal landscape surrounding retirement plan management.

In conclusion, while the Supreme Court’s ruling offers a glimmer of hope for employees seeking accountability from their employers regarding retirement plan fees, it also raises critical questions about the balance of interests between employees, employers, and service providers in the complex world of retirement planning. The outcome of this case could pave the way for more rigorous oversight and a reevaluation of the practices currently employed by fiduciaries in managing retirement assets. As stakeholders await further developments, it remains crucial for employees to stay informed and engaged regarding their retirement benefits, ensuring that their interests are adequately represented and protected.