The U.S. Supreme Court will hear oral arguments April 2 in a pivotal defined contribution case.
The nation's highest court could throw out a nearly 20-year-old legal principle and open the door to discovery in stock-drop lawsuits. That, in turn, could make plan executives more vulnerable to court challenges.
If the Supreme Court upholds the 6th U.S. Circuit Court of Appeals' decision in the case of Fifth Third Bancorp et al. vs. Dudenhoeffer, it also could discourage defined contribution plans from adding company stock to — or keeping company stock in — their investment menus.
However, if the high court reverses the appeals court, that would reinforce the barrier — already endorsed by several other appellate courts — that participants face in proving a sponsor's fiduciary failure when the price of company stock in the plan falls.
The cornerstone of the debate is the Moench presumption, a legal principle first articulated by a federal appeals court in 1995. It gives the benefit of the doubt — a presumption of prudence — to fiduciaries that offer company stock as an investment option in their defined contribution plans.
Plan sponsors have used the Moench presumption defense often and successfully when participants have alleged a breach of fiduciary duty if the stock falls sharply. Many courts have invoked the Moench presumption at the motion-to-dismiss stage.
In the Fifth Third case, the 6th Circuit said the Moench presumption shouldn't be applied at the motion-to-dismiss stage. Plan participants, the plaintiffs in the suit, should have the “opportunity for formal discovery,” the court said.
The appeals court overruled a U.S. District Court decision to dismiss fiduciary breach claims by former participants in a Fifth Third Bancorp 401(k) plan. The District Court cited the Moench presumption, saying Fifth Third remained “a viable company” during the period in which plaintiffs alleged that the fiduciary breach occurred.
Plaintiffs had alleged plan executives violated ERISA by allowing participants to continue investing in company stock even though the stock's value plunged 74%.
Now that the high court has the case, sharp debate is emerging, pitting the Department of Labor against various business and financial trade groups and defined contribution industry members.
The DOL has branded the Moench presumption “an artificial hurdle” to enforcing provisions of the Employee Retirement Income Security Act. But officials at the trade groups say weakening or removing the Moench presumption would encourage more lawsuits and higher legal costs, and would discourage plan sponsors from keeping or adding company stock to their investment menus.
“If there is no presumption of prudence, there will be a lot of revisiting of the use of company stock in plans,” said Robyn Credico, the Arlington, Va.-based defined contribution practice leader for Towers Watson & Co.
“Over the last 10 years, companies have looked more carefully at whether to keep company stock due to litigation risk,” said Roberta Ufford, a principal at the Groom Law Group, Washington. “Some employers say it's not worth the risk.”
Some of her clients have considered eliminating company stock as an investment option due to litigation concerns as well as to offer a more diversified investment lineup. “More importantly, fewer are adding it,” she said.
Mercer LLC consultant Amy Reynolds said: “I don't see many clients deciding to add company stock. It's more of a legacy issue.” Ms. Reynolds, a Richmond, Va.-based partner and U.S. defined contribution practice leader, added there is “heightened sensitivity” because of the suits.