Little Plan Sponsor Reaction to No Presumption of Prudence

A survey finds the majority of DC plan sponsors that offer company stock as an investment option have no plans to make changes to the offer, despite a more complex company stock environment.

Following a U.S. Supreme Court decision that fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA), 72.7% of defined contribution (DC) plan sponsors that offer company stock indicated they anticipate no changes to their offerings this year.

According to the 2015 Defined Contribution (DC) Trends Survey by the Callan Investments Institute, 9.1% said they will regularly review company stock in investment committee meetings, while another 9.1% said they will eliminate company stock as a plan option. The same percentage said they are waiting to make a decision pending the outcome of ongoing stock drop lawsuits.

Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates in Chicago, tells PLANADVISER she expected the number of plan sponsors taking a “wait-and-see” approach to be higher. She also expected that more plan sponsors would investigate outsourcing the oversight of their company stock, but only 4.5% said they would.

The survey found 4.5% of plan sponsors intend to freeze their company stock investment offering this year, and the same percentage said they will change language in their investment policy statement.

Lucas concedes that it is hard to determine the best reaction to the decision because the court was not entirely clear about what actions plan sponsors should take. The question of what the trustee of a retirement plan that offers employer stock as an investment option is supposed to do with inside information that the stock price may be overvalued was prevalent in the high court’s discussion of the case. The court also considered whether fiduciaries of ESOPs have a presumption of prudence that plan participants cannot overcome in a lawsuit unless they plausibly allege plan fiduciaries abused their discretion by remaining invested in employer stock. The court laid out points to consider in a court’s analysis in situations in which the complaint alleges a fiduciary was imprudent in failing to act on the basis of inside information.

The Supreme Court remanded the case to the 6th U.S. Circuit Court of Appeals to consider whether 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.

“The company stock environment is clearly more complex,” Lucas notes.

The Callan survey found that in 2014, all plan sponsors that offer company stock reported taking some action to limit their liability. The most common action was to communicate diversification principles to plan participants (54.5%), which is required by the Pension Protection Act (PPA) of 2006. Plan sponsors also frequently cited hardwiring company stock into the plan document (40.9%) and offering tools to improve participants’ diversification out of company stock (36.4%). Callan noted that hardwiring company stock into the plan has been a common defense in stock-drop lawsuits; however, this is likely to change following the Supreme Court’s June 2014 ruling.