Compliance

401(k) Participant Sues Target over Company Stock

Recognizing the new pleading standards set forth in Fifth Third v. Dudenhoeffer, the lawsuit suggests alternative actions plan fiduciaries could have taken rather than continuing to allow investments in company stock.

By Rebecca Moore editors@strategic-i.com | July 15, 2016

A proposed class action lawsuit filed by a participant in Target Corporation’s 401(k) plan alleges the company violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to allow participants to invest in the company stock fund when it was no longer prudent.

The class period is from February 27, 2013, to May 19, 2014, and the complaint cites failures in the company’s Canadian operations and failures to disclose the problems as reasons Target stock was trading at artificially inflated prices. The stock price precipitously dropped when failures were disclosed.

As other courts have recognized that the new pleading standards set forth in the Supreme Court’s opinion in Fifth Third v. Dudenhoeffer require plaintiffs to suggest alternative actions plan fiduciaries could have taken that would not have violated securities laws or been perceived as doing more harm than good to the plan, the Target complaint offers several actions the company could have taken to prevent participant losses in the company stock fund.

The complaint says defendants could have (and should have) directed that all company and plan participant contributions to the company stock fund be held in cash or some other short-term investment rather than be used to purchase Target stock. “A refusal to purchase company stock is not a ‘transaction’ within the meaning of insider trading prohibitions and would not have required any independent disclosures that could have had a materially adverse effect on the price of Target stock,” the complaint says.

Defendants also should have closed the company stock fund itself to further contributions and directed that contributions be diverted into prudent investments based on participants’ instructions or, if there were no instructions, into the plan’s default investment option, the complaint suggests. Alternatively, according to the complaint, defendants could have disclosed (or caused others to disclose) Target’s true problems with its Canadian Segment so Target stock would trade at a fair value.

Other recommended actions noted in the lawsuit include:

  • Defendants should have sought guidance from the Department of Labor (DOL) or Securities and Exchange Commission (SEC) as to what they should have done;
  • Defendants could have resigned as plan fiduciaries to the extent they could not act loyally and prudently; and/or
  • Defendants should have retained outside experts to serve either as advisers or as independent fiduciaries specifically for the fund.

The complaint in Knoll v. Target Corporation is here.