Chicago area employees participating in an employer sponsored retirement plan that holds the employer’s stock, or an employee stock ownership plan (“ESOP”) have reason to rejoice. Yesterday, the Supreme Court of the United States unanimously voted to increase the rights of the participants, in contrast to the holdings of every court of appeals to date. Until now, every circuit court of appeals has held that fiduciaries of a retirement plan which by is terms is required to or may hold employer stock is entitled to a “presumption of prudence” in continuing to have the plan hold that employer stock. When participants would challenge the fiduciaries’ decision to retain employer stock in the plan, alleging the fiduciaries knew the stock was overvalued, courts would routinely dismiss such lawsuits unless the complaint plausibly alleged there was a “precipitous decline” in the stock value, or the employer was on the brink of collapse. This was the effect of the presumption of prudence.
During the real estate and mortgage crisis, Fifth Third Bank’s retirement plan allowed participants to invest in the company’s ESOP. After Fifth Third stock plummeted, participants alleged that the fiduciaries of the plan, who were corporate executives, knew that the stock was overvalued because of Fifth Third’s investment in mortgages, and should have sold the stock from the plan, refrained from purchasing more Fifth Third Stock, or disclosing the negative inside information to allow the market to correct the stock price. The district court dismissed the lawsuit because the plaintiffs failed to overcome the presumption of prudence in the complaint. The United States Court of Appeals for the Sixth Circuit reversed, holding the presumption of prudence exists, but it is an evidentiary presumption that does not apply at the pleading stage. Essentially, the Sixth Circuit departed from all other circuits. The remaining circuits required plaintiffs to overcome this presumption in the complaint (before obtaining any discoverable information from the fiduciaries), and the Sixth Circuit would allow the case to proceed beyond the complaint and allow discovery to determine whether participants can overcome the presumption.
In an unexpected move, the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___ (2014) held that there is no presumption of prudence at all. Relying on the plain text of the statute, the Supreme Court found no reason to draw a distinction in the duty of prudence between fiduciaries of an ESOP and those of any other retirement plan. The only distinction drawn in the statute is that ESOP fiduciaries do not have a duty to diversify the assets of the plan, but there is no statutory basis to diminish the duty of prudence for ESOP fiduciaries, whereby participants need to show the stock held by the fiduciaries was of a company on the “brink of collapse.” The effect of this holding will be that more participants will be able to recover when fiduciaries of plans holding employer stock make imprudent decisions to retain that stock, knowing it is overvalued.
If you have questions about your rights as a participant in a retirement plan, contact a knowledgeable ERISA lawyer.