Prohibited Transactions in 401(k)s: what they are, how they’re papered over, and why they’re still actionable

The big picture (in plain English)

ERISA draws a bright line: plan fiduciaries must act solely for participants, and must not engage in conflicted deals. The “bright line” lives in ERISA §406 (prohibited transactions). Over time, industry lobbyists have piled up exemptions (statutory §408 and DOL PTEs) and talking points like: “Sure, everything could be a PT… but there’s an exemption for that.” The trick is: exemptions are conditional (necessity, reasonableness, disclosures, impartial conduct, etc.). If the conditions aren’t satisfied, it’s still a prohibited transaction—and plaintiffs don’t have to pre-plead the absence of an exemption. That’s now black-letter law after Cunningham v. Cornell (U.S. Supreme Court, Apr. 17, 2025). kutakrock.com+3Supreme Court+3Ropes & Gray+3

“Who polices PTs?”—the Siedle moment

Edward “Ted” Siedle told me a story from a mid-2000s DOL training in Norman, Oklahoma: DOL staff asked who polices prohibited transactions. He said, “You do.” They reportedly answered they were told it “wasn’t their job.” I didn’t find a public record of that training, but Siedle’s contemporaneous critique appears in a 2009 post (“DOL Still AWOL”), blasting the Department for green-lighting conflicted arrangements via exemptions and inaction—language that matches what many of us have seen in the field. Bogleheads

Why Cunningham v. Cornell changes the temperature

The Supreme Court held that §408 exemptions are affirmative defenses. To state a §406(a)(1)(C) PT claim, a participant need only plausibly allege (1) a fiduciary caused a transaction; (2) the transaction furnished services/products; (3) with a party-in-interest. The defense must then prove an exemption (e.g., necessary services for no more than reasonable compensation). That means “we’re exempt” is not a pleading shield; it’s a burden the defense must carry—with facts. Supreme Court+2Groom Law Group+2

Where the conflicts hide (investments and recordkeeping)

1) Recordkeeping & platform arrangements

What the rule says: If a fiduciary causes the plan to buy services from a party-in-interest (the recordkeeper is one), it’s a §406(a) PT unless an exemption fits—typically §408(b)(2): “necessary services” and “no more than reasonable compensation.”

Why this bites: After Cunningham, plaintiffs don’t need to front-plead reasonableness. They can allege: “plan hired party-in-interest for recordkeeping,” and the case proceeds to discovery on actual compensation, share classes, revenue-sharing, float, managed-account cross-selling, etc. Multiple courts and client alerts are already flagging the lower pleading bar. Supreme Court+1

Practice note: Older scholarship describes how the fiduciary rule and PTE architecture evolved—and how ERISA’s bright-line prohibitions were always meant to constrain conflicted distribution models (useful context to rebut “this is all new” defenses). I write about this at https://commonsense401kproject.com/2025/10/23/revenue-sharing-in-401k-and-403b-plans-why-its-a-prohibited-transaction/

2) Annuities & insurance spread deals

What changed: For years, the industry leaned on PTE 84-24 to shoehorn insurance commissions and annuity sales into ERISA plans. In 2016, DOL tightened 84-24—excluding variable and fixed-indexed annuities from the easy path and pushing them into stricter conditions (then a “best-interest contract” framework). Even with later rule churn, the Federal Register record shows DOL’s rationale: these products are complex, conflict-heavy, and need rigorous conditions if sold at all. Federal Register+1
Bottom line: If a dual-registered advisor/recordkeeper steers a plan into an insurer’s general account, separate account, or annuity sleeve and they’re capturing commissions, revenue share, or spread profits, you have a textbook §406(b) self-dealing risk unless an exemption (strictly) fits—rare in practice. I write about this in more detail at https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/

3) Private equity/credit, real assets, crypto—often via CIT wrappers

If alternatives are smuggled into state-regulated CIT target-date funds, you can stack conflicts: the trust company/recordkeeper affiliation, sub-adviser fees, valuation discretion, and liquidity gates. The sales pitch is “institutional and cheaper,” but if the governance is weak and disclosures thin, §406(a)/(b) issues multiply (and the exemption case gets harder to carry). (My Shnitser-anchored pieces cover the regulatory gap; this section is the PT lens.) I write about this in more detail at https://commonsense401kproject.com/2025/11/02/target-date-funds-in-state-regulated-collective-investment-trusts-citsrisk-and-the-basis-for-a-prohibited-transaction-claim/

“Everything’s a PT” (industry line) vs. how exemptions really work

Two widely cited pro-industry takes are now circulating:

Doran (2025) argues Cunningham over-reads §406(a)(1)(C), complaining it would outlaw ordinary services unless §408(b)(2) is read into the claim itself. But that’s exactly what the Supreme Court rejected: exemptions are affirmative defenses. The statute’s structure—§406 prohibitions / §408 exemptions—controls. The practical upshot isn’t to ban recordkeeping; it’s to force fiduciaries to prove services are necessary and compensation reasonable. That’s healthy discipline, not “outlawing the ordinary.”
Oringer & Rabitz (2023/24) present the sophisticated, markets-friendly view of ERISA practice, emphasizing how lawyers help “run the ERISA gauntlet” so plans can access advanced strategies. Fair—but that sophistication doesn’t erase §406(b) self-dealing or §406(a) party-in-interest payments. If a structure pays affiliates, layers platform fees, or hides spread profits, you’re back in PT land unless the exemption conditions are met—with evidence.

For balance, consumer-leaning analysis on fiduciary standards (including how DOL’s ESG detours were used to chill scrutiny) underscores that ERISA’s lodestar remains exclusive benefit, prudence, and loyalty—and that PT prohibitions are the teeth behind those duties.

And if you want the long view, David Pratt’s classic treatments of fiduciary/“investment advice” rulemakings show why so many “ordinary” sales models were always dancing on the edge of ERISA’s prohibited-transaction cliff.

Appendix – Key Practitioner Quotes & Authorities

A. Practitioner Q&A Insights (Theado & Naegele, Wickens Herzer Panza)

“404(c)… is an affirmative defense… sponsors still have retained fiduciary duties… including prudent selection and monitoring of the plan’s investment alternatives.”
— Theado & Naegele, Litigating an Employee Benefit Claim (Part 2), p. 5.
“The fiduciary must avoid a participant or trustee investment that could result in a prohibited transaction… even if you qualify under §404(c).”
— Ibid. p. 5.
“If the 3(38) fiduciary does a really lousy job, then plan officials and 3(21) fiduciaries will ultimately be held responsible because they selected the adviser and failed to properly monitor those activities.”
— Theado & Naegele, Can You Really Avoid ‘Fiduciary Liability’? (Part 2), left column.
“Service agreements that say ‘we are not taking responsibility’ or include hold-harmless clauses are not dispositive of fiduciary status.”
— Ibid., right column.