Second Circuit Narrows ERISA Fiduciary Mismanagement Claims But Revives Prohibited Transaction Theory

In Collins v. Ne. Grocery, Inc., No. 24-2339-CV, 2025 WL 2383710 (2d Cir. Aug. 18, 2025), the Second Circuit addressed a wide-ranging challenge brought by participants in the Northeast Grocery 401(k) Savings Plan, who alleged that fiduciaries breached duties of prudence and loyalty and engaged in prohibited transactions under ERISA. The panel issued a split disposition: affirming dismissal of most claims for failure to state a claim, but vacating dismissal of the prohibited transaction and related “breach by omission” claims in light of the Supreme Court’s recent decision in Cunningham v. Cornell University.

The plaintiffs—employees of Price Chopper and Tops Market following their merger into Northeast Grocery—participated in the company’s 401(k) plan and alleged broad fiduciary mismanagement. Their seven-count complaint charged fiduciaries with imprudent selection and retention of investment options, allowing excessive recordkeeping and advisory fees, engaging in conflicted transactions, and failing to monitor the plan’s committee.

The district court dismissed the complaint in its entirety, some claims for lack of Article III standing and others for failure to state a plausible claim. The court also dismissed Plaintiffs’ request to amend, and the plaintiffs appealed. In a separate precedential opinion, the Second Circuit upheld the standing dismissals. In this companion summary order, the panel turned to whether the surviving claims were adequately pled.

The court affirmed dismissal of the imprudence and disloyalty theories. It emphasized that ERISA plaintiffs must plead “nonconclusory factual content” sufficient to raise a plausible inference of misconduct, rather than hindsight criticism of investment outcomes.

Investment Underperformance: Allegations that the Fidelity Freedom 2030 Fund lagged behind a T. Rowe Price comparator were inadequate because plaintiffs failed to show the comparator was a meaningful benchmark. Similarly, small gaps in performance by the Loomis Sayles Small Cap Value Fund and the T. Rowe Price Blue Chip Fund were insufficient to infer imprudence. A decline in fund value, without more, does not establish a fiduciary breach.

Excessive Fees: Claims that CapFinancial Partners (investment advisor) and Fidelity (recordkeeper) charged excessive fees lacked supporting facts. Plaintiffs did not allege that fees were disproportionate to services or that comparator plans offered virtually identical services at lower cost. Even the allegation that no competitive bidding was conducted, while relevant, was insufficient alone to establish imprudence.

Process Allegations: The panel rejected arguments that flawed outcomes in a few funds implied systemic fiduciary misconduct. Without specific factual allegations about fiduciary processes, such inferences were too speculative.

The most significant development arose in connection with the prohibited transaction claim under ERISA § 406(a). Plaintiffs alleged that fiduciaries’ selection of certain funds caused the plan to pay excessive fees directly and indirectly (via revenue sharing) to Fidelity and CapFinancial, both “parties in interest.”

The district court dismissed, applying the Second Circuit’s earlier rule that plaintiffs must plead not only that a prohibited transaction occurred, but also that compensation was “unreasonable” or “unnecessary.” While this appeal was pending, however, the Supreme Court in Cunningham v. Cornell University abrogated that rule, holding that reasonableness is an affirmative defense, not a pleading requirement. A plaintiff need only plausibly allege that the plan engaged in one of the transactions enumerated in § 406(a).

Applying Cunningham, the Second Circuit vacated dismissal of Count Five (prohibited transactions), finding plaintiffs’ allegations of revenue-sharing arrangements sufficient to state a claim.

By contrast, the court found that Count Six, alleging self-dealing under § 406(b), was properly dismissed. Plaintiffs’ conclusory assertions that fiduciaries intended to enrich Fidelity and CapFinancial did not distinguish between lawful revenue-sharing and illicit kickbacks.

The panel affirmed dismissal of the co-fiduciary liability and duty-to-monitor counts, since those claims depended on adequately pled breaches of prudence or loyalty. But because Count Seven (breach by omission) was predicated on the prohibited transaction theory, the court vacated its dismissal alongside Count Five.

The court upheld denial of leave to amend. Plaintiffs had made only a cursory request in their opposition brief, without identifying additional facts that could cure the deficiencies. Under Second Circuit precedent, such a request is inadequate to preserve the right to amend.

Although most of plaintiffs’ claims fell short of ERISA’s demanding pleading standards, the Second Circuit revived their prohibited transaction and omission claims in light of the Supreme Court’s Cunningham decision. The case was affirmed in part, vacated in part, and remanded for further proceedings.