A brief from the U.S. Solicitor General recommending that the U.S. Supreme Court hear a “stock-drop” class-action case could make it the most important ERISA litigation of the High Court’s current term. Employee benefits attorneys watching the case’s progress say a High Court decision could deter employers from offering employer stock as a 401(k) plan investment option.
In recent years, increased litigation by plan participants has emerged over whether plan sponsors breached their fiduciary duty under ERISA when company stock offered in defined contribution plans falls and participant retirement accounts lose value. Federal circuit courts of appeal and district courts around the United States have supported employers in these cases, so a High Court decision would clarify whether participants have a right to sue over sharp company-stock declines.
Many plan sponsors claim that making employee stock ownership plans part of their DC plans is a matter of plan design, not fiduciary discretion, but a series of lawsuits by participants has challenged that position.
Ruling in Plaintiffs’ Favor
The case the solicitor general proposes the High Court hear reversed the trend toward plan sponsor support. In September 2012, the 6th U.S. Circuit Court of Appeals in Cincinnati ruled in favor of the plaintiffs in Dudenhoeffer v. Fifth Third, No. 11-3012 (6th Cir., Sept. 5, 2012), saying that the “presumption of prudence,” also known as the Moench presumption, does not apply at the initial stages of a stock-drop case. Sixth Circuit judges have a record of decisions favorable to ERISA class-action plaintiffs alleging breaches of fiduciary duty.
On Nov. 12, 2013, the Solicitor General’s Office, at the High Court’s request and on behalf of the U.S. Department of Labor, filed a friend-of-the-court brief seeking a petition for certiorari in Fifth Third v. Dudenhoeffer ( No. 12-751 ) so that the Court can consider two key issues:
- whether the 1995 Moench presumption, which provides a legal shield for plan sponsors’ investment decisions, applies at the early stage, when a complaint is filed; and
- whether financial statements in summary plan descriptions are fiduciary communications.
The solicitor general suggests the Supreme Court reframe these questions, rule that ESOPs are subject to divestment and prudence review, and indicate that the presumption of prudence is not a given in stock-drop cases. The brief contends ERISA does not guarantee such protection for plan sponsors’ investment decisions “at any stage of the proceedings.” It does not recommend the Court hear the second point on SPDs, arguing that it’s clear they are fiduciary communications.
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