A federal appeals court in Cincinnati ruled in favor of Cliffs Natural Resources Inc., rejecting a complaint by participants in the company's 401(k) plan that plan managers violated their fiduciary duties by retaining a company stock fund in the plan's investment menu.
The ruling by the appeals court upheld a decision by a U.S. District Court judge in Cleveland 12 months ago to dismiss the complaint in the case of Saumer et al. vs. Cliffs Natural Resources Inc. et al. Plaintiffs had argued that plan executives breached their fiduciary duty under the Employee Retirement Income Security Act by keeping a company stock fund even though the stock plunged due to a slump in iron ore prices.
The participants “allege it was imprudent to continue investing in Cliffs stock,” according to the appeals court decision issued April 7. Plaintiffs maintained that fiduciaries “possessed inside information showing that the stock was overvalued” and they argued that fiduciaries should have acted when iron prices and coal prices fell, the decision said.
The appeals court noted that Cliff Natural Resources' stock lost 95% of its value between 2011 and 2015, battering the employee stock ownership plan component in a 401(k) plan that also offered 28 mutual funds.
However, the appeals court cited the Supreme Court decision in Fifth Third Bancorp et al. vs. Dudenhoeffer et al. to support the District Court and Cliffs Natural Resources. The Supreme Court ruling established broad guidelines for lower courts to use in evaluating stock-drop cases.
Referring to the Supreme Court ruling, the appeals court said fiduciaries may “prudently assume that stock markets provide the best estimate of a security's value.” Given that guideline, the ESOP fiduciary “may take for granted that the security's market price reflects the company's value,” the court wrote.
As for the non-public information allegation, the appeals court said the participants “failed to plausibly allege” that a prudent fiduciary would have done more harm than good by maintaining the stock vs. stopping stock purchases or disclosing negative information about iron ore and coal prices.
The judges acknowledged the risks of investing in an undiversified investment option such as company stock. “Regardless of the merits of employee stock ownership, the lack of safeguards ensuring employees diversify their assets frequently begets financial ruin,” they wrote. “Any policy change to protect employees, however, must come from Congress, not the courts.” The Cliffs Natural Resources Inc. and its Associated Employers Salaried Employees Savings Plan had $179.7 million in assets as of Dec. 31, 2015, according to its latest Form 5500.