U.S. Supreme Court Abolishes the Presumption of Prudence in ERISA Stock Drop Cases


A recurring scenario in ERISA litigation involves claims against fiduciaries of 401(k) retirement plans who are alleged to have breached their fiduciary duty by failing to discontinue investment in employer stock following a material drop in the stock price. The question is: Under what circumstances will a failure to stop investment in employer stock support a claim for breach of fiduciary duty? To date, every circuit—except the Sixth—that has considered the issue has applied a “presumption of prudence” that required a complaint to allege non-conclusory facts showing that the fiduciaries knew or should have known that the corporate employer faced dire circumstances that threatened its financial viability.

On June 25, 2014, the U.S. Supreme Court issued its opinion in Dudenhoeffer v. Fifth Third Bancorp, et al., No. 12-751, categorically rejecting the “presumption of prudence.” The Court instead held that complaints in ERISA stock drop cases should be reviewed under Rule 12 “plausibility” standards, applying a “careful, context-sensitive scrutiny of a complaint’s allegations.”

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