The Second Circuit recently made two rulings of interest to ERISA litigators and to fiduciaries of 401(k) or other defined contribution plans. In the first ruling, the court held that individual plan participants did not have constitutional standing to assert claims of breach of fiduciary duties of oversight concerning funds in which the plaintiffs did not invest. In the second ruling, the court remanded to the district court the plaintiffs’ claims that certain plan contracts with service providers were prohibited transactions under ERISA in light of the Supreme Court’s Cunningham decision.
In Collins v. Northeast Grocery, Inc.,[1] individual 401(k) plan participants brought a putative class action alleging that plan fiduciaries had breached their fiduciary duties by including certain underperforming investment options in the plan’s investment lineup and by permitting the plan to pay excessive fees to service providers. The plaintiffs also alleged that certain service provider contracts constituted ERISA prohibited transactions - - that is, contracts between the plan and a party in interest that did not fit within statutory exemptions. The district court had granted the defendants’ motion to dismiss the entire complaint and the plaintiffs appealed. On appeal, the Second Circuit mostly affirmed the district court ruling and issued an unusual two-part opinion, one published and one unpublished (but publicly available).
The published opinion concerned the plaintiffs’ standing. The Second Circuit held that the individual named plaintiffs were not entitled to bring claims involving the fees or investment performance of funds or share classes in which they did not invest. The plaintiffs did not satisfy the Constitution’s Article III standing requirement to bring a federal case, according to the court, because their failure to allege investment in these underperforming/revenue sharing funds meant that they did not allege individual injuries to themselves. The dismissed claims were for breach of the duty of prudence, based on the fiduciaries’ alleged failures to investigate the availability of alternative share classes or alternative funds and to monitor indirect recordkeeper costs; and for breach of the duty of loyalty, regarding funds that compensated service providers with revenue sharing. The named plaintiffs also lacked standing to bring these claims on behalf of other plan participants for essentially the same reason: their lack of individual injuries made them unsuitable class representatives for claims of misconduct affecting other participants.
In the unpublished opinion, the panel affirmed the district court’s dismissal of the breach of fiduciary duty claims for which the plaintiffs did have standing, for failing to plead more than conclusory facts concerning the fiduciaries’ selection and monitoring of investment option performance and service provider compensation. However, the panel remanded the prohibited transaction claims for further consideration in light of the Supreme Court’s Cunningham decision, which had come out after the district court’s ruling.
Earlier this year, in Cunningham,[2] the Supreme Court had noted that ERISA designates certain transactions between the plan and parties in interest as prohibited transactions, subject to exemptions, including an exemption for contracts for services that are necessary for the operation of the plan and for which “no more than reasonable compensation is paid.” Because Congress set up the exemptions in the “format of an affirmative defense,” the Supreme Court held that, at the pleading stage, the plaintiffs “are not required to plead and prove” that the exemptions do not apply.[3] The justices understood that this rule would make it difficult to challenge prohibited transaction claims at the pleading stage, and went so far as to suggest alternative ways in which district courts could “screen out meritless claims before discovery.”[4]
On remand, the Collins district court will have the opportunity to apply Cunningham in a case in which all other claims were dismissed and, potentially, to consider the justices’ suggestions for alternative screening procedures.
[1] F. 4th, 2025 WL 2382948 and 2025 WL 2383710 (both 2d Cir., August 18, 2025).
[2] Cunningham v. Cornell University 604 U.S.; 145 S. Ct. 1020 (2025).
[3] Id., 145 S. Ct. at 1028, 1032 (citing 29 U.S.C. §1106 (prohibited transactions),1108 (exemptions)).
[4] Id., 145 S. Ct. at 1032; see id. at 1033 (Alito, J., concurring).
