The U.S.
Supreme Court has spoken. In a June,
2014, decision the Court held in Fifth
Third Bank v. Dudenhoeffer that fiduciaries of a retirement plan designed
to offer employer securities – an ESOP – are not entitled to a special
presumption of prudence in offering employer securities as plan
investments. Specifically at issue was whether
such a plan’s fiduciaries are duty-bound to restrict or remove such an investment
option when the employer’s financial health is in question, and the value of
its securities may be in doubt.
In
the background behind the ESOP specifics of this case was the broader issue of
whether offering employer securities in any
qualified plan should be presumed to be prudent. Under such a presumption, referred to as the
“Moench presumption” for the case after which it is named, the burden of proof
that offering employer securities is inappropriate rests with the plaintiff alleging
a fiduciary breach. But, not only did
the Court rule that plans designed to offer employer securities have no special
presumption of prudence, it rejected the Moench presumption out of hand. This finding is contrary to several Appeals
Court rulings that supported in principle such a presumption of prudence.
Some
have seen the Supreme Court’s ruling as a blow to fiduciaries of plans offering
employer securities, expecting a rash of new stock drop lawsuits. We, as consultants and as retirement plan
recordkeepers, have already been asked by some plan sponsors how they might
gracefully and in a compliant, participant-friendly manner remove employer
securities as plan investments. Although
the selection of prudent investments is clearly the province of a plan’s fiduciaries,
we would caution plan sponsors not to react in knee-jerk fashion and blindly remove
what might be a prudent option from its investment lineup.
A
close look at the Court’s ruling may conclude that it actually raised the bar and
made it more difficult for stock drop cases to be brought successfully. The Court stated in its opinion that it would
not be enough for a plaintiff to allege that a fiduciary armed with publicly
available information should have recognized that the employer securities being
held and offered to participants were over-valued. To successfully bring a cause of action a
plaintiff would also have to plausibly present that
- a fiduciary could have acted on its
knowledge of the business’s solvency and its securities’ value – for example ceasing
to offer, or liquidating, plan investments in employer securities – without violating insider trading laws, and
- a prudent fiduciary in the same
circumstances would not have viewed such actions as more likely to harm the
investment fund than to help it; meaning, that market reaction to the
fiduciary’s investment changes could actually cause the value of existing
investments to drop, to the detriment of participants holding those investments.
Some ERISA
litigation analysts are of the opinion that these will be formidable obstacles
for a plaintiff, or a class of plaintiffs, to overcome in order to prevail in a
stock drop lawsuit. It will be no surprise if we initially see a spike in
the number of lawsuits alleging impropriety in offering employer securities as
plan investments. But it may be that
only when lower courts have applied the standards in the Supreme Court’s
opinion that we can draw conclusions about the prospects for the success of such
litigation in the future. 