Employee Benefits Update: Unanimous Supreme Court Issues ERISA Fiduciary Duty Opinion

by Snell & Wilmer

On June 25, the Supreme Court issued a unanimous decision in Fifth Third Bancorp v. Dudenhoeffer, which is likely to change the future of the Employee Retirement Income Security Act (ERISA) stock drop litigation. 

Factual Background

The plaintiffs in the case were participants in Fifth Third Bancorp’s defined contribution plan (the Plan). The Plan had a number of different investment options, including an employer stock fund that was designated as an employee stock ownership plan (ESOP). The ESOP portion of the Plan was required to be invested primarily in Fifth Third common stock.

The plaintiffs alleged that the Plan fiduciaries breached their fiduciary duties and should have known, on the basis of both publicly available information and inside information, that the Fifth Third stock was overpriced and excessively risky.

The plaintiffs alleged that that the Plan fiduciaries should have (1) sold the ESOP’s holdings of Fifth Third stock before its value declined, (2) refrained from purchasing any more of Fifth Third’s stock, (3) cancelled the ESOP option in the Plan and (4) disclosed the inside information so that the market would adjust its valuation of Fifth Third’s stock downward and the ESOP would no longer be overpaying for the stock.

The Plan fiduciaries, however, continued to hold and purchase Fifth Third stock and the price of Fifth Third’s stock declined by 74 percent between July 2007 and September 2009. 

Procedural History

The District Court dismissed the case for failure to state a claim. In dismissing the case, the District Court held that where a lawsuit challenges ESOP fiduciaries’ investment decisions, “the plan fiduciaries start with a presumption that their ‘decision to remain invested in employer securities was reasonable.’” The District Court held that this presumption applied at the pleading stage of litigation and that the plaintiffs’ allegations were insufficient to overcome the presumption.

The Sixth Circuit Court of Appeals reversed the District Court. The Sixth Circuit agreed that the fiduciaries are entitled to a presumption of prudence, but determined that the presumption only applied at the evidentiary stage and not at the pleading stage. The Sixth Circuit held that the plaintiffs’ allegations were sufficient to state a claim for breach of fiduciary duty.   

Supreme Court Decision

Fifth Third appealed the Sixth Circuit’s decision. The Supreme Court held that ESOP fiduciaries are not entitled to a presumption of prudence. Rather, ESOP fiduciaries are subject to the same standard of prudence that applies to all ERISA fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s investments.

The Supreme Court remanded the case to the Court of Appeals with guidance on how to apply the pleading standard. In its decision, the Court provided that when a stock is publicly traded, an allegation that a fiduciary should have recognized from publicly available information alone that the stock was overvalued or undervalued is generally implausible, absent special circumstances. 

The Supreme Court also provided that to state a claim for breach of fiduciary duty on the basis of insider information, a plaintiff must allege an alternative action that the defendant could have taken that would be consistent with the securities laws and that a prudent fiduciary would not have viewed as more likely to harm the stock fund than help it. According to the Court, three points should be considered in this analysis:

  • ERISA does not require a fiduciary to break the law (e.g., federal securities laws).
  • Courts should consider whether the decision to purchase stock or failing to disclose information to the public could conflict with the insider trading laws and corporate disclosure requirements and the objectives of those laws.
  • Courts should consider whether a prudent fiduciary could have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the stock.

Future Stock Drop Litigation

After this case, plan fiduciaries no longer may rely on or benefit from a presumption of prudence with respect to investments in employer stock. Plan fiduciaries may also find that plan language authorizing continued investment in employer stock in the absence of certain dire circumstances will be of little value. At the same time, in the case of a publicly traded employer/plan sponsor and in the absence of non-public information, it appears that a claim for breach of fiduciary duty for purchasing employer stock or divesting of employer stock will remain limited. Absent special circumstances, plan fiduciaries may continue to assume that the market value of publicly traded employer stock is the best estimate of the stock’s value. 

It remains to be seen how courts will apply the standards that the Supreme Court articulated for claims based on nonpublic information and for claims against the fiduciaries who purchase stock or retain the stock of a non-publicly traded employer. Nevertheless, it remains clear from the Supreme Court’s decision that plan fiduciaries must actively monitor an employer stock fund in accordance with ERISA’s prudence requirement and that fiduciaries remain personally liable if their failure to do so leads to financial harm to plan participants.

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.

© Snell & Wilmer | Attorney Advertising

Written by:

Snell & Wilmer

Snell & Wilmer 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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.