Supreme Court won’t hear 401(k) company stock appeals

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U.S. Supreme Court

The U.S. Supreme Court on Monday denied without comment two petitions from 401(k) plan participants seeking greater responsibility from plan fiduciaries over company stock investment options.

The “stock drop” petitions were brought by participants in plans sponsored by Citigroup Inc. and The McGraw-Hill Cos. who claimed that plan sponsors failed their fiduciary duty under ERISA regarding the prudence of offering company stock as an investment option, and the disclosure of market conditions affecting that stock.

The plaintiffs had argued in their original lawsuits that the companies had misled them about their defined contribution plans' exposure to subprime mortgage losses.

District and appeals court judges hearing the cases supported the companies, ruling that a fiduciary investing in company stock is entitled to a presumption of prudence unless a breach of fiduciary duties can be shown or the company is in a dire economic situation.

Department of Labor officials filed a friend-of-the-court brief when the cases were heard by the 2nd U.S. Circuit Court of Appeals in New York, calling the lower-court rulings “an alarming dilution” of ERISA and “a windfall for fiduciaries” who would no longer have the expense of complying with ERISA-mandated prudence obligations. The questions of presumption of prudence and fiduciary duties “are of exceptional importance … because they put hundreds of billions of dollars in pension plan assets at undue risk,”

DOL lawyers argued in their brief. DOL officials declined to comment on the Supreme Court denial of review.

Jeremy Blumenfeld, attorney at Morgan Lewis & Bockius, which handles similar cases for plan sponsors and filed an amicus brief in the appellate court, called Monday's decision “a positive development” but predicted that some stock-drop cases could continue in judicial jurisdictions perceived to be more favorable to such lawsuits.

“Just because stock goes up and down we shouldn't have the lawsuits,” said Scott Macey, president and CEO of the ERISA Industry Committee, which represents corporations on benefit issues. Mr. Macey, interviewed Monday, said that the Supreme Court's refusal was proper “because there wasn't any major split. When fiduciaries are held liable it's because they failed; it's not because in hindsight something went wrong. It's not about the stock itself; it's do they have a good and thorough process in place according to which they make their decisions?”

Calls to the law firms representing the Citigroup and McGraw-Hill employees were not returned.

Citigroup's two defined contribution plans have assets of $7.2 billion, and McGraw-Hill's two DC plans have assets of $2 billion.