ERISA -- 2014



Fifth Third Bancorp v. Dudenhoeffer   (U.S. Supreme Court)

Fiduciary duties of Employee Stock Ownership Plan managers

The NAM and other coalition associations filed an amicus brief on February 3, 2014, in a case on appeal from the Sixth Circuit. We asked the Supreme Court to consider when the managers (fiduciaries) of an Employee Stock Ownership Plan (ESOP) have a legal duty to stop investing in the company’s own stock as it relates to perceived risk. Our brief explains that ESOPs are unique vehicles designed to invest primarily in company stock, and are unable to go through the same evaluation standards utilized by managers of other types of investments. Therefore, investments in employer stock should be presumed to be prudent, and should only be deemed imprudent when the company is at risk of financial collapse.

Seven circuit courts have held that fiduciaries that offer employer stock funds are entitled to a “presumption of prudence” since the typical tools available to fiduciaries to evaluate investment options are not applicable in the case of Employee Stock Ownership Plans. Nearly every circuit to address the question has ruled that this presumption— which, in substance, is a standard for adjudicating a fiduciary’s liability—can be rebutted only upon a showing of dire financial circumstances that would undermine the congressional purpose in encouraging employer stock ownership.

The Sixth Circuit diverged from the “dire circumstances” test, holding that the presumption of prudence can be overcome whenever a plaintiff proves that “a prudent fiduciary acting under similar circumstances would have made a different investment decision.” The Sixth Circuit also held that the presumption of prudence is an evidentiary, rather than a substantive, standard and therefore refused to apply it on a motion to dismiss.

The NAM believes that attempts to weaken the presumption of prudence will deter manufacturers from offering employer stock funds in the future.

The Supreme Court ruling removed the presumption of prudence for employer managers offering company stock as a retirement option. The decision leaves employers stuck “between a rock and a hard place”, the Court acknowledged, in a unanimous decision penned by Justice Stephen Breyer. If an employer offers company stock and the price dips they might be sued for violating the duty of prudence under the federal Employee Retirement Income Security Act. But if they dump the stock on behalf of their employees because they know the company’s in trouble, they might violate insider-trading laws. These questions were left to the lower courts to decide.


Related Documents:
NAM brief  (February 3, 2014)