Compliance

ESOP Fiduciaries Not Entitled to Presumption of Prudence

The U.S. Supreme Court has decided fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA).

By Rebecca Moore editors@assetinternational.com | June 25, 2014
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In its unanimous opinion in Fifth Third Bancorp v. Dudenhoeffer (docket number 12-751), the high court says they are subject to the same duty of prudence that applies to ERISA fiduciaries in general per Section 1104(a)(1)(B), except that they need not diversify the fund’s assets, per Section 1104(a)(2). The court notes that Section 1104(a)(1)(B) imposes a ‘prudent person’ standard by which to measure fiduciaries’ investment decisions and disposition of assets, and Section 1104(a)(1)(C) requires ERISA fiduciaries to diversify plan assets. But, Section 1104(a)(2) establishes the extent to which those duties are loosened in the ESOP context by providing that “the diversification requirement of [§1104(a)(1)(C)] and the prudence requirement (only to the extent that it requires diversification) of [§1104(a)(1)(B)] [are] not violated by acquisition or holding of [employer stock].”

The justices agreed that Section 1104(a)(2) makes no reference to a special “presumption” in favor of ESOP fiduciaries and does not require plaintiffs to allege that the employer was on the “brink of collapse,” as some circuit courts have established.

“Thus, aside from the fact that ESOP fiduciaries are not liable for losses that result from a failure to diversify, they are subject to the duty of prudence like other ERISA fiduciaries,” Justice Stephen G. Breyer wrote in the opinion.

Instructing the 6th U.S. Circuit Court of Appeals, the Supreme Court said that on remand, the appellate court should reconsider whether the complaint states a claim by applying the pleading standard as discussed in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly, considering that where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim. The pleading standard requires that to state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.