(Updated with correction)
The U.S. Supreme Court Wednesday debated the special burden placed on fiduciaries by the inclusion of employee stock options within defined contribution plans.
The case, Fifth Third Bancorp et al. vs. John Dudenhoeffer et al, was brought to the court by the bank, some of whose plan participants sued when company stock values dropped. While many jurisdictions have ruled that plan fiduciaries enjoy a presumption of prudence in managing employee stock investments in defined contribution plans, the 6th Circuit U.S. Court of Appeals in Cincinnati said that presumption does not apply at the initial stages of a case.
High court justices hearing the case went beyond the question of whether and when to apply a presumption of prudence to also focus on how fiduciaries can protect plan participants from falling stock values without violating insider-trading laws.
Defined contribution plan fiduciaries “are between a rock and a hard place,” said Justice Anthony Kennedy during questioning. “I do not understand how we are going to implement what Congress wanted” by allowing for employee stock as a retirement plan option.
Scott Macey, president and CEO of the Washington-based ERISA Industry Committee, which represents corporations on benefit issues, called the hearing “an appropriate discussion.” He said justices “saw the quandary that fiduciaries would be in if they were to act on insider information.”
Keeping a 20-year legal standard that offers fiduciaries the presumption of prudence, known as the Moench presumption, “is a reasonable and appropriate balance of the various concerns and interests, and applying at the pleading stage makes the most sense,” said Mr. Macey.
The presumption “will act as a bulwark against 'stock drop' cases that simply allege a major drop in stock price with no additional and plausible evidence,” said Dean Schaner, an attorney with the Houston-based labor and employment practice group at law firm Haynes and Boone. If the Supreme Court decides that the presumption only applies after the discovery stage, plan executives will have to review investment options and plan language to avoid having their decisions litigated, he said. Removing it entirely “would give employers a decreased incentive to offer ESOPs or similar investments in company stock at all,” said Mr. Schaner.
