Seismic Shift For Employer Stock In ERISA Account Plans: Supreme Court Voids Presumption Of Prudence

In Fifth Third Bancorp v. Dudenhoeffer, decided June 25, 2014, the Supreme Court unanimously rejected a presumption of prudence for employer stock held in ERISA individual account plans (known as the "Moench presumption"). This reversed a line of favorable federal appeals court cases that provided the playbook for employer strategies to mitigate risk associated with offering employer stock as a plan investment- a reversal resulting in a seismic shift for employer stock strategies in individual account plans. In doing this, the court clearly sought to avoid a flood of litigation by specifically critiquing key claims against the Fifth Third Bancorp fiduciaries that are common in stock-drop litigation. For now, however, this switches out the well-developed jurisprudence supporting the Moench presumption for defenses that will inevitably be tested and illuminated over time. Further, it will require plan sponsors and fiduciaries to redo their defensive paradigm for offering employer stock, which was constructed around this presumption.

Below we provide context for the decision and note additional detail on the case, the key takeaways and practical next steps.

1. Background on Stock-Drop Litigation

   In an effort to encourage broad-based ownership by employees of their companies, Congress created employee stock ownership plans (ESOPs), which are retirement plans that invest primarily in employer stock. Congress also provided an exception to ERISA's fiduciary duties eliminating the duty of diversification with respect to employer stock in individual account plans (including ESOPs and 401(k) plans). As a result of these rules, employer stock is relatively common in individual account plans, and it often constitutes more than an insignificant share of participants' holdings. Although Congress encouraged stock ownership by ERISA participants, fiduciaries have faced an onslaught of cases alleging it was imprudent for the plan to hold employer stock, usually following a stock price drop.

2. Presumption of Prudence

   The Third Circuit was the first to recognize a "presumption of prudence" for ESOP fiduciaries, finding that ESOP fiduciaries are presumed to be prudent in following plan terms requiring employer stock investments, and this presumption can only be rebutted by a showing of an abuse of discretion by the fiduciaries, such as knowledge of the impending collapse of the company. Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995). Over the years, this...