Presumption of Prudence

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For over two decades, federal courts have embraced the so-called Moench presumption of prudence in ERISA stock-drop cases. Pursuant to that presumption, courts have routinely dismissed such claims absent allegations in a complaint that a company’s situation was dire, or that the company was on the brink of collapse. On June 25,2014, the U.S. Supreme Court issued its decision in the highly anticipated case, Fifth Third Bancorp v. Dudenhoeffer, wherein it concluded by unanimous decision that the presumption of prudence could not be supported by the text of ERISA. As discussed below, that may be at most only mixed victory for the plaintiffs’ bar.

Factual Background

Participants in Fifth Third Bancorp’s (Fifth Third’s) defined contribution retirement plan (Plan) brought a putative class action against the Plan’s fiduciary committee, among others, alleging that defendants breached their fiduciary duties in violation of ERISA.

Under the Plan, participants made contributions into an individual account and directed the Plan to invest those contributions in a menu of options pre-selected by Fifth Third. Of the twenty options available to participants during the relevant period, one was the Fifth Third stock fund, which had been designated an employee stock ownership plan (ESOP). Fifth Third matched the first 4% of a participant’s contributions with company stock, after which participants could move such contributions to any other investment option.

Plaintiffs’ complaint alleged that Fifth Third shifted from a conservative to a subprime lender and, consequently, Fifth Third’s loan portfolio became increasingly exposed to defaults. It further alleged that Fifth Third either failed to disclose the resulting damage to the company and its stock or provided misleading disclosures. During the relevant period, Fifth Third’s stock price declined 74%, resulting in the ESOP losing tens of millions of dollars.

Plaintiffs commenced a putative class action lawsuit, alleging, among other things, that defendants breached their fiduciary duties under ERISA by: (i) imprudently maintaining significant investment in Fifth Third stock and continuing to offer it as an authorized investment option; and (ii) by failing to provide Plan participants with accurate and complete information about Fifth Third and the risks of investment in Fifth Third stock.

As the employee benefits world awaits the U.S. Supreme Court’s decision in Dudenhoeffer v. Fifth Third Bancorp, two federal courts recently dismissed employer stock-drop cases brought under ERISA on the ground that plaintiffs failed to overcome the presumption that a fiduciary’s decision to remain invested in employer stock was prudent. See Smith v. Delta…

Having settled into the new year, we reflect on decisions from the U.S. Supreme Court in 2013 that are likely to have a significant impact in the world of pension and welfare employee benefits and, in some cases, already have had such an impact. The issues addressed by the Supreme Court are wide ranging and are both substantive and procedural.

They include same sex marriage benefits, welfare plan reimbursement provisions, statute of limitations and class certification. Looking ahead into 2014, we see that the Supreme Court has already agreed to decide several significant benefits issues, including issues pertaining to Employee Retirement Income Security Act stock-drop litigation, the so-called “contraceptive mandate” under the Affordable Care Act and whether the Federal Insurance Contributions Act tax applies to reduction in force related severance pay.

On Friday, the US Supreme Court agreed to consider Fifth Third Bancorp v. Dudenhoeffer (U.S. No. 12-751, cert. granted 12/13/13).  The Supreme Court stated that it will consider the following issue:  “Whether, to state a claim that a fiduciary of an employee stock ownership plan violated the duty of prudence by continuing to invest plan…

The Second Circuit recently affirmed the dismissal of former Lehman Brothers employees’ fiduciary breach claims relating to their investment in the Lehman Brothers stock fund through their 401(k) plan. Rinehart v. Akers, 2013 WL 3491281 (2d Cir. July 15, 2013). As is typical for cases of this type, the complaint included both a claim…

The Fifth Circuit recently joined four other circuits (the Second, Third, Seventh and Eleventh Circuits) in holding that the presumption of prudence applicable in employer stock fund cases is appropriately applied at the motion to dismiss stage of a litigation.  Kopp v. Klein, 2013 WL 3449866 (5th Cir. July 9, 2013).   Applying the presumption,…