Court Sides with Dell in Company Stock Suit

A district court ruled that the Dell Inc. 401(k) Plan did not violate fiduciary duties by allowing more than half of the assets to be invested in company stock.

The U.S. District Court for the Western District of Texas ruled that fiduciaries at Dell did not violate their duties under the Employee Retirement Income Security Act (ERISA) by permitting more than 50% of the plan’s assets to be invested in Dell company stock.

In granting Dell’s motion to dismiss the case, the court noted that the Dell plan is an eligible individual account plan (EIAP) and therefore exempt from ERISA’s diversification requirements. Under terms of the plan, it was authorized to acquire and hold up to 100% of its assets in Dell stock.

The district court also agreed with Dell that since participants in the plan directed their own investments the plan cannot create any duty to diversify assets by overriding participant investment choices. In addition, according to the opinion, The Dell Inc. 401(k) plan was properly diversified by offering participants 15 different investment options.

Dell also argued the investment in company stock did not breach the statutory duty of prudence because its stock price never suffered a “precipitous decline” during the class period, and the court agreed.

In their case, the plaintiffs alleged that the plan’s holding of 50.79% of assets in Dell company stock violated the diversification requirements of the plan. The plaintiffs also contended the concentration of company stock violated the fiduciaries’ duty of prudence because they either knew or should have known the stock price was artificially inflated due to Dell’s use of improper accounting and financial reporting techniques.

The fiduciaries were also accused of providing misleading information to participants through a summary plan description that referenced Dell’s materially false or misleading filings from the Securities Exchange Commission (SEC) filings. Finally, the plaintiffs said the board of directors failed to adequately monitor the plan’s investment committee.

The case is In re Dell Inc. ERISA Litigation, W.D. Tex., No. A-06-CA-758-SS, 6/23/08.