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Supreme Court Decision Changes Standards for Employer Stock in Retirement Plans

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The Supreme Court recently decided a case that eliminates the “presumption of prudence” for plan fiduciaries relating to their investment in employer stock in retirement plans.  In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court determined that fiduciaries of an employee stock ownership plan (“ESOP”) are not entitled to a presumption of prudence.  Rather, the ESOP fiduciaries must comply with 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.

In its decision, the Supreme Court provided a roadmap for the lower courts in applying the pleading standard.  In short, the Court stated that when stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the stock was overvalued or undervalued are generally implausible, absent special circumstances.

When the allegation of a breach of fiduciary duty is based on nonpublic information, a plaintiff must allege an alternative action that the plan fiduciary 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 that 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.

For additional information on this case, please see our Employee Benefits Update here.