Most Stock Drop Cases Involve 401(k) Plans

In a new review of litigation on the issue of employer stock in retirement plans, the National Center for Employee Ownership has found almost all of the stock drop cases involve 401(k) plans, not employee stock ownership plans (ESOPs).

Altogether, there were 43 401(k) cases the NCEO identified during the last 12 months. In the ESOP area specifically, there were no groundbreaking decisions or consistent trends among the 23 cases.

The NCEO says what is most striking in the ESOP area is the small number of lawsuits given the more than 11,000 existing plans. Of particular note is that only one of the cases involved improper valuation. The Department of Labor has made a very controversial proposal to make appraisers ESOP fiduciaries, partly because it believes there are a lot of inaccurate appraisals (see “Law Firm Supports Making ESOP Valuators Fiduciaries“). Over the last 20 years, however, there are rarely more than a few valuation cases that reach court per year.

The review also found in the last 12 months, courts have largely continued to favor defendants. Two circuit courts (the 2nd and 9th) have ruled if a 401(k) plan mandates investment in employer securities, that alone precludes action against fiduciaries. By a two-one margin, district courts, and one appeals court, ruled defendants deserve a presumption of prudence for holding employer stock. Under that theory, participants can only prevail if they can prove that the fiduciaries knew or should have known that the company was in imminent danger of collapse. 

Ten of 11 courts also ruled that fiduciaries were not required under Securities Laws to make disclosure of non-public information to plan participants. Courts were split of whether former participants retained standing to sue.  

There were also a number of settlements during the year, most providing participants with fairly small amounts of money (in the $1,000 to $2,000 range often).
The report can be ordered from