A U.S. Supreme Court decision on whether to accept for review two ERISA cases could lead to a rush of participant lawsuits over company stock investment options in defined contribution plans.
“The outcome of these cases would have a palpable impact on the large percentage of the Fortune 1000 (companies) that have employer stock in their 401(k) plans,” said Jeremy Blumenfeld, an attorney in the Philadelphia office of Morgan, Lewis & Bockius LLP, which has handled many similar cases for pension plans, and filed an amicus brief in the Citigroup case.
“The risks are not just to employers, but to employees who may no longer be offered company stock in their plans if the risks are too great.”
The court on Oct. 11 reviewed the arguments for taking the cases this term. A decision on whether to review the cases is expected to be announced Oct. 15.
The petitions for review were brought by participants in 401(k) plans sponsored by Citigroup Inc. and The McGraw-Hill Cos., both in New York.
Both seek a ruling on separate lawsuits alleging their DC plans violated the Employee Retirement Income Security Act's fiduciary duty standard on several fronts, including the prudence of having company stock as an investment option, and whether there was adequate disclosure of conditions affecting that stock.
Representatives for plan executives say they are hoping that the court will take a pass, and instead let the lower court rulings stand, which could dampen enthusiasm for further challenges.
“We don't want our courts clogged every time a stock goes down, unless there is a reason,” said Scott Macey, president and CEO of The ERISA Industry Committee, Washington, which represents corporations on employee benefits issues. Cases involving stock declines, especially in volatile markets, “aren't abuses of discretion. You can't hold people liable for not knowing. We all know that stocks can go down.”
Despite their dismay at the proliferation of participant-led “stock-drop” lawsuits following the 2008-2009 financial crisis, plan executives are encouraged that most district and circuit courts have dismissed the cases in the early stages, Mr. Macey said.
The Citigroup suit was brought by several plaintiffs on behalf of 150,000 employees participating in two defined contribution plans with current assets of $7.2 billion. The McGraw-Hill plaintiffs participated in one of two defined contribution plans with current assets of $2 billion.