The 6th Circuit reversed a lower court’s decision to dismiss the case because employee stock ownership plan (ESOP) sponsors are given a presumption of prudence in keeping plan assets invested in company stock due to the nature of the plan (see “Judge Tosses Fifth Third Stock Drop Suit”). The appellate court noted that the “legislative history combined with a natural and clear reading of § 404 [of the Employee Retirement Income Security Act (ERISA)] [led] to the inexorable conclusion that ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary except to the extent that the standards require diversification of investments.”
They do not relieve a fiduciary from the general responsibility provisions of § 1104—which require a fiduciary to discharge his duties respecting the plan solely in the interests of plan participants and beneficiaries and in a prudent fashion—nor does it affect the requirement that a plan must be operated for the exclusive benefit of employees and their beneficiaries.
The 6th Circuit also recalled its previous decision in Pfeil v. State Street Bank and Trust Company, holding that the presumption “is not an additional pleading requirement and thus does not apply at the motion to dismiss stage.” In that ruling, the appellate court explained that an ESOP plaintiff could rebut this presumption of reasonableness by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision, which is best-served through a fully developed evidentiary record (see “Appellate Court Reopens Case Against State Street by GM Participants”).
As Pfeil explained, plaintiffs need only allege a fiduciary breach and a causal connection to losses suffered by the plan, which the court determined the plaintiffs in the Fifth Third suit have done. John Dudenhoefer and Alireza Partovipanah, former employees of Fifth Third Bank, allege that Fifth Third engaged in lending practices that were equivalent to participation in the subprime lending market that they were aware of the risks of such investments by the start of the class period, and that such risks made Fifth Third Stock an imprudent investment. The plaintiffs allege the price of Fifth Third Stock dropped 74% during the class period.
The Amended Complaint also expressly alleges that “[a]n adequate (or even cursory) investigation would have revealed to a reasonable fiduciary that investment by the Plan in Fifth Third Stock was clearly imprudent. A prudent fiduciary acting under similar circumstances would have acted to protect participants against unnecessary losses, and would have made different investment decisions.”
The opinion in Dodenhoefer v. Fifth Third Bank is here.