The Supreme Court Of The United States Holds That ESOP Fiduciaries Are Not Entitled To A Presumption Of Prudence, Clarifies Standards For Stock Drop Claims

On June 25, 2014, the Supreme Court of the United States unanimously held that there is no special presumption of prudence for fiduciaries of employee stock ownership plans ("ESOPs"). Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. ___ (June 25, 2014) (slip op.).

Background

The Employee Retirement Income Security Act of 1974, as amended ("ERISA") imposes legal duties on fiduciaries of employee benefit plans, including ESOPs.1 Specifically, ERISA requires the fiduciary of an employee benefit plan to act prudently in managing the plan's assets. 2 In addition, ERISA requires the fiduciary to diversify plan assets.3

ESOPs are designed to be invested primarily in employer securities.4 ERISA exempts ESOP fiduciaries from the duty to diversify plan assets and from the duty to prudently manage plan assets, but only to the extent that prudence requires diversification of plan assets.5

The recent financial crisis generated a wave of ERISA "stock drop" cases, which were filed after a precipitous drop in the value of employer securities held in an ESOP. Generally, the plaintiff alleged that the ESOP fiduciary breached its duty of prudence by investing in employer securities or continuing to offer employer securities as an investment alternative. Defendant fiduciaries defended on the ground that the plaintiff failed to rebut the legal presumption that the fiduciary acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.

The Federal Circuit Courts of Appeals that had considered the issue adopted the rebuttable presumption of prudence but split on the issues of (1) whether the legal presumption applied at the pleadings stage of litigation or whether the legal presumption was evidentiary in nature and did not apply at the pleadings stage of litigation and (2) the rebuttal standard that the plaintiff of a stock drop action must satisfy. 6

Dudenhoeffer held that ESOP fiduciaries are not entitled to a legal presumption that they acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.7

The Dudenhoeffer Case

Fifth Third Bancorp maintained a defined contribution plan, which offered participants a number of investment alternatives, including the company's ESOP. The terms of the ESOP required that its assets be "invested primarily in shares of common stock of Fifth Third [Bancorp]."8 The company offered a matching...