The Supreme Court has agreed to hear the case of Fifth Third Bancorp v. Dudenhoeffer,1 in which the Sixth Circuit Court of Appeals, in response to a motion to dismiss, declined to adopt a presumption of prudence in favor of a plan fiduciary’s investment in employer stock under a retirement plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).2 Certain retirement plans, such as employee stock ownership plans (“ESOPs”), are specifically designed to invest all or a portion of their assets in stock of the sponsoring employer. Generally, under ERISA, a plan fiduciary must act prudently with respect to the fiduciary’s investment decisions for the plan. Prior to Dudenhoeffer, six federal appellate courts, including the Sixth Circuit,3 had stated generally that an ERISA plan’s investment in employer stock is presumed prudent if the plan documents expressly provide for such investment.
The Moench presumption, so known because of the case that introduced the presumption, Moench v. Robertson,4 derives from the various provisions in ERISA and the Internal Revenue Code of 1986 facilitating and even encouraging investment in stock of the employer by ESOPs and other covered retirement plans. Under the Moench presumption, where a plan either requires or favors investment in employer stock, a fiduciary’s decision to invest in such stock may be presumed to be prudent absent evidence to the contrary. The Moench presumption has repeatedly been applied at the motion-to-dismiss stage, thus potentially acting to shield employers and other plan fiduciaries from protracted litigation.
Over the years, there has been a spate of so-called “stock-drop” cases, in which it has been alleged that fiduciaries were in breach of their duties under ESOPs and 401(k) and other plans invested in employer stock, in cases in which the value of that stock has dropped, often precipitously. The Moench presumption has as a practical matter been a significant factor in helping certain employers and fiduciaries attain a sufficient comfort level that investment in company stock under a plan would not result in liability, notwithstanding a possible drop in the stock’s value.
Three of the specific issues raised by the appeal in Dudenhoeffer are (i) what must the plan documents say in order for the presumption to apply, (ii) what is the nature of the allegations that would be sufficient to overcome the presumption, and (iii) whether the presumption applies at the pleadings stage.
The first of these issues has been highlighted by two recent decisions that held that the presumption did not apply because the plans did not sufficiently require or encourage investment in the employer’s stock.5 The second issue has also been the subject of some discussion by the courts.6
Because the Sixth Circuit expressly departed from rulings of other circuit courts on whether the presumption applies at the pleadings stage, the third issue has become a significant focus of the Dudenhoeffer appeal. A number of circuit courts that have adopted the Moench presumption7 have expressly held that the presumption is not an evidentiary standard but rather a standard of review – a substantive legal standard of liability and conduct, akin to the application of the business-judgment rule that can serve to protect certain decisions of corporate directors and officers. Further, the Moench presumption is not necessarily limited to protecting plan fiduciaries against allegations involving a breach of the duty of prudence. Rather, if, on a motion to dismiss, a court finds that defendant fiduciaries were not in breach of their fiduciary duty of prudence, the court may also dismiss all claims that are viewed as derivative of the imprudence allegation, including, for example, alleged breaches of the duty to monitor other fiduciaries, the duty of loyalty, the duty to diversify and the duty to refrain from making material misrepresentations.
The Dudenhoeffer case could have broad implications, possibly going well beyond the specifics of when and how the Moench presumption is applied. In an amicus brief submitted by the Solicitor of Labor and Solicitor General,8 the government took a position that went even further than siding with the Dudenhoeffer plaintiffs. After arguing against adopting the presumption at the pleadings stage, the government went on to request that the Court strike down the presumption altogether, asserting broadly that “a judicially fashioned presumption . . . contravenes the objectives of ERISA.”9 If the Supreme Court in Dudenhoeffer either invalidates or significantly narrows the Moench presumption, there exists the real possibility that large numbers of sponsors and fiduciaries of ESOPs and other plans invested in employer stock will take an extremely close look at whether such investments are worth the risk. In that event, sponsors and fiduciaries may be particularly likely to consider eliminating a plan's stock-investment feature where the feature forms only part of an otherwise broader plan, so that eliminating the investment in employer stock may be feasible without changing the fundamental nature of the plan.
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The Supreme Court is scheduled to hear oral argument in Dudenhoeffer on April 2, and we expect to issue an update after the case is decided. If you have any questions regarding Dudenhoeffer or what it may mean for you, please contact either of the Dechert attorneys listed below or your regular Dechert contact.