A U.S. Supreme Court decision has lowered the pleading standard for plaintiffs filing prohibited transaction lawsuits, changing how plan sponsors manage legal risk. The Plan Sponsor Council of America magazine sought insights from the firm’s co-founding partner and fiduciary and plan governance practice chair, Carol Buckmann.
The April ruling in Cunningham v. Cornell University made it easier for plaintiffs to allege a prohibited transaction without having to claim that a plan fiduciary acted improperly or that fees were unreasonable.
“That opens the door to a lot of ‘fishing expeditions’ by plaintiffs’ attorneys,” Buckmann said. “Because now, as a plaintiff, you just need to make a bare-bones allegation of a prohibited transaction, without having to plead (at the motion-to-dismiss phase) that the plan fiduciaries actually did anything wrong.”
As fiduciaries need third-party service agreements to run their plans, it’s crucial that they document why service provider arrangements are reasonable and compliant, keeping detailed records of decisions and maintaining a structured process to defend against potential claims, even when no wrongdoing occurred.
“The plan fiduciaries really need to make sure that they are using an exemption correctly,” Buckmann said.