U.S. Supreme Court Rejects Presumption of Prudence for Benefit Plan Investments in Employer StockAugust 2014
In Fifth Third Bancorp v. Dudenhoeffer,1 a unanimous Supreme Court rejected the presumption of prudence doctrine (also known as the Moench doctrine)2, which is applicable to claims against fiduciaries of benefit plans that invest in the sponsoring employer's stock. The elimination of the presumption of prudence is expected to make it easier for plaintiffs to pursue claims for breach of fiduciary duty when there is a significant drop in the value of employer stock held in an employee benefit plan.
In Dudenhoeffer, the defendant, Fifth Third Bancorp (the "Bank"), maintained an employee stock ownership plan ("ESOP") that was largely invested in the Bank's stock. The plaintiffs alleged that the ESOP's fiduciaries breached their fiduciary duties under ERISA by continuing to hold Bank stock and continuing to offer Bank stock as an investment option. Following a 74% drop in the Bank's stock price, the plaintiffs sued claiming that the publicly available information provided early warning signs that the Bank's stock was inflated due to the Bank's exposure to sub-prime mortgage loans. The plaintiffs also claimed that the fiduciaries were aware of nonpublic information that the Bank had deceived the market by making material misstatements about its financial prospects.
Under the Moench doctrine, fiduciaries of employee benefit plans that offer investments in employer stock were entitled to a presumption of prudence. The presumption of prudence created a significant burden for plaintiffs to overcome in pursuing claims against fiduciaries for imprudent investments in employer stock.
In Dudenhoeffer, the Supreme Court unanimously concluded that the law does not create a special presumption favoring fiduciaries that invest in employer stock. As a result, such fiduciaries are subject to the same standards of prudence as all ERISA fiduciaries. The Supreme Court further noted that a plan sponsor may not reduce or waive the prudent man standard by including specific language in the plan document. In response to the claim that the fiduciaries of the ESOP were aware of nonpublic information about the material misstatements about the Bank's financial prospects, the Supreme Court explained that the duty of prudence does not require fiduciaries to take actions that would violate securities laws, such as insider trading requirements.
While the rejection of the presumption of prudence may lessen the burden for plaintiffs to pursue claims for breach of fiduciary duty when the value of an employer's stock drops, the Dudenhoeffer case indicates that plaintiffs must show special circumstances as to why reliance by a fiduciary on the public market price is imprudent. In addition, plaintiffs must plausibly allege an alternative course of action that the fiduciary could have taken that would have been consistent with securities laws, and that a prudent fiduciary would not have viewed as more likely to harm the benefit plan than to help it.
1 2014 BL 175777 (US, June 25, 2014).
2 See Moench v. Robertson, 62 F.3d 553 (3d Cir., 1995).
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