Supreme Court to Decide Applicability of the “Prudence Presumption” in ERISA Stock Cases: ESOP and 401(k) Plan Sponsors and Fiduciaries, Take Note

Introduction -

In Fifth Third Bancorp v. Dudenhoeffer, the U.S. Supreme Court will decide whether investments in employer stock are entitled to a “prudence presumption” under the Employee Retirement Income Security Act (ERISA) and, if so, whether that presumption should apply at the pleadings stage of an ERISA lawsuit. The outcome of the Court’s ruling will have important implications for employee stock ownership plans (ESOPs)—which, by their nature, are designed to invest primarily in employer stock—as well as other ERISA-eligible individual account plans (EIAPs), such as 401(k) plans that offer employer stock as an option on the menu of investment funds.

ERISA “Stock Drop” Claims -

To date, more than 200 ERISA employer “stock drop” class action lawsuits have been filed alleging that plan fiduciaries breached their ERISA duties of prudence and loyalty by allowing participants to invest their plan accounts in employer stock. Following the Enron/WorldCom scandals of 2001 to 2002 and the more recent global financial crisis, there has been a significant uptick in the filing of these complaints. In a number of instances, ERISA stock-drop complaints have been filed as tagalongs to securities fraud complaints against companies and their executives.

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