On Wednesday, June 25, 2014, the Supreme Court issued its decision in Fifth Third Bancorp v. Dudenhoeffer, concerning the responsibilities of ESOP fiduciaries with respect to defined contribution retirement savings plans holding employer stock (ESOPs and 401(k) plans). Prior to the Supreme Court decision, most federal circuit courts who had analyzed the issue had ruled that ERISA fiduciaries could rely on a “presumption of prudence” in continuing to offer or hold such securities in the plan, absent “dire circumstances” (such as the imminent bankruptcy of the employer). This presumption of prudence, generally referred to as the “Moench Presumption” after the Third Circuit case in which it first appeared in 1995), had been applied by many courts to dismiss ERISA claims against plan fiduciaries in “stock drop” litigation.
In a unanimous decision the Supreme Court rejected the Moench Presumption, holding that ERISA/ESOP fiduciaries are not entitled to any special “presumption of prudence,” in holding stock within the plan, but are subject to the same general duty of prudence as all ERISA fiduciaries (with the exception of diversifying the ESOP’s/stock funds assets).
The Court did provide some limited guidance on how plan sponsors and fiduciaries (both internal fiduciaries as well as independent investment managers) and the lower courts should interpret fiduciary claims regarding publicly-traded company stock:
While we are still analyzing the decision and its implications for plan sponsors and fiduciaries, please do not hesitate to reach out to any of the members of the Evercore Trust team if you wish to discuss this further. A copy of the decision is attached here.