June 25, 2014 - News

Supreme Court Decision in Fifth Third Bancorp v. Dudenhoeffer

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:

  • For a plaintiff’s lawsuit to state a violation of ERISA’s prudence requirements, the complaint must contain plausible allegations of breach of fiduciary duty to survive a motion to dismiss.
  • As a general matter, an allegation is “plausible” only if there is (i) an alternative action that a fiduciary could have taken, (ii) such action is “legal,” (e.g., no violation of the Securities laws prohibiting insider trading) and (iii)  a prudent fiduciary would have viewed taking that alternative action, under the same circumstances,  as more likely to do good than harm.
  • If the fiduciary does not have access to inside information (e.g., an independent fiduciary or manager), allegations of a breach of  fiduciary duty claim  in connection with a drop in the price of publicly-traded stock would generally be “implausible” and could be dismissed, absent “special circumstances” that would make reliance on the market’s valuation imprudent.   The Supreme Court did not define the term “special circumstances” in this case.
  • With respect to “internal fiduciaries,” the Supreme Court focused on the possession by these individuals of inside/material nonpublic information, and whether or not a plausible claim could be made.  The Supreme Court expressly states that ERISA does not allow an internal ERISA fiduciary to violate the federal securities laws by using insider information to affect the decision to buy or sell company stock in a plan.  However, the Court has left open the possibility of other plausible claims by plaintiffs that an inside ESOP fiduciary  breached ERISA by failing to stop purchasing stock or disclosing information to the public.

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.