What Does the Supreme Court’s Ruling in Fifth Third Bancorp v. Dudenhoeffer Mean for ESOPs and Other Retirement Plan Fiduciaries?

by Buchanan Ingersoll & Rooney PC
Contact

Fiduciaries of qualified retirement plans, including Employee Stock Ownership Plans (ESOPs), have generally been entitled to a presumption that they have acted prudently in offering employer stock as an investment alternative when the terms of the plan require or encourage the fiduciary to invest primarily in employer stock (commonly referred to as the Moench presumption). In Fifth Third Bancorp v. Dudenhoeffer, 2014 WL 2864481 (June 25, 2014), the Supreme Court unanimously rejected the Moench presumption and held that ESOP fiduciaries are subject to the same fiduciary duty of prudence under ERISA that applies to all retirement plan fiduciaries (other than the duty to diversify). The Court, however, arguably narrowed the circumstances under which participants can successfully allege a breach of that standard.

In Dudenhoeffer, participants in an ESOP claimed that the ESOP fiduciaries breached their fiduciary duty by failing to sell company stock, and instead continued to purchase company stock in the run up to the housing market collapse of 2008. The participants asserted that the ESOP fiduciaries knew the company’s stock was overvalued because of market indicators and the fiduciaries’ insider knowledge, and that the fiduciaries should have acted on this information to reduce the ESOP’s holdings in company stock. The district court dismissed the participants’ claim because, according to the court, the fiduciaries were entitled to a presumption that their decision to purchase company stock was prudent. On appeal, the Sixth Circuit reversed, finding that although the presumption of prudence was a valid presumption, it was an evidentiary standard that did not apply at the pleading stage and that the participants had adequately alleged a claim for breach of fiduciary duty.

No Presumption of Prudence

The Supreme Court disagreed with the lower courts and held that ESOP fiduciaries are not entitled to a special presumption of prudence. Instead, the Court determined that ESOP fiduciaries are subject to the same standard of prudence that applies to ERISA fiduciaries, except that an ESOP fiduciary has no duty to diversify investments. Accordingly, while ESOP fiduciaries are not obligated to diversify the investments of an ESOP so as to minimize the risk of large losses, an ESOP fiduciary’s decision to buy or hold company stock is subject to the prudent man standard of care.

Guidance for Lower Courts and Plan Fiduciaries

The Court addressed how the fiduciary duty standard should be applied to ESOP fiduciaries in the context of a motion to dismiss and provided guidance that lower courts should consider in their analysis. First, the Court noted that a fiduciary would not be acting imprudently, absent special circumstances, to assume that a major stock market provides the best estimate of the value of the stock. To this end, the Court stated that, “where a stock is publicly traded, allegations that a fiduciary should have recognized, from publicly available information alone, that the market was over or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances….”

Second, the Court noted that ERISA’s duty of prudence cannot require an ESOP fiduciary to perform an act that would violate the securities law. The Court explained that “[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Court explained that where ESOP trustees are charged with a breach of fiduciary duty because the trustees did not buy or sell company stock based on inside information or did not inform the public of inside information, “the court should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws….”

Third, the Court stated that, when ruling on such claims, lower courts should “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases – which the market might take as a sign that insider fiduciaries view the employer’s stock as a bad investment – or publically disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

Practical Considerations

Although the Supreme Court’s decision eliminates the ability of ESOP and ERISA plan fiduciaries to rely on the Moench presumption, it does not substantially change the legal landscape and the duties owed by plan fiduciaries. ESOP trustees are still subject to the prudent man standard of care (as they were previously), and while they cannot rely on a presumption of prudence, the Court placed additional burdens on plaintiffs when alleging facts intended to establish a breach of that standard.

As we monitor future lower court decisions in light of the additional guidance the Court set forth in Dudenhoeffer, plan sponsors and fiduciaries should consider the following action items:

  • If a plan expressly requires the investment in employer stock (or that employer stock must be offered as an investment), the plan sponsor should review the current language to determine whether any changes are necessary or advisable. Plan provisions of this nature will not override the duty of plan fiduciaries to determine whether it remains prudent to offer and/or hold employer stock.
  • Plan fiduciaries must establish or modify existing procedures to periodically evaluate whether offering and/or holding investments in employer stock remains prudent. For example, plan fiduciaries should review existing investment policy statements to ensure that they remain adequate, including establishing procedures to address precipitous drops in the value of employer stock.
  • Re-evaluate the appointment of existing plan fiduciaries. After Dudenhoeffer, it appears even clearer that the CEO, CFO and possibly other senior corporate executives should not serve as a plan fiduciary (e.g., on a plan committee).
  • Re-evaluate the training of plan fiduciaries and use of third party advisors. At a minimum, plan fiduciaries should be trained on the fiduciary obligations arising under ERISA, including the duty to monitor employer stock and other investments offered under the plan.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Buchanan Ingersoll & Rooney PC | Attorney Advertising

Written by:

Buchanan Ingersoll & Rooney PC
Contact
more
less

Buchanan Ingersoll & Rooney PC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!