And that's why a recent federal appeals court decision provides the ERISA equivalent of a booster shot for sponsors' defenses.
The 7th U.S. Circuit Court of Appeals ruled on Aug. 1 that a sponsor doesn't have fiduciary liability in a stock-drop case if the sponsor hired an independent third party to manage the company-stock fund within a 401(k) plan.
"If I were an independent fiduciary looking for a marketing pitch, this is it," said David Levine, a Washington-based principal at Groom Law Group, referring to the ruling in the case of Burke et al. vs. The Boeing Company et al.
"It makes the argument for having an independent fiduciary," said Mr. Levine, who represents sponsors in ERISA cases. "This is a clear, well-written decision — a master class in laying it all out."
The appeals court upheld a ruling by a U.S. District Court judge in Chicago, who dismissed in November 2020 the stock-drop lawsuit filed by four participants in the $73.9 billion Boeing Co. Voluntary Investment Plan.
They sued in March 2019, saying plan fiduciaries failed to protect their company-stock investments, which were weakened due to a pair of crashes of the Boeing 737 MAX airplane and to allegations that the company didn't publicly disclose design problems with the aircraft.
"We agree with the district court that the delegation of investment decisions to an independent fiduciary means that neither Boeing nor the other defendants acted in an ERISA fiduciary capacity in connection with the continued investments in Boeing stock," the appeals court judges wrote. The independent fiduciary, Newport Trust Co., was not a defendant.
A Boeing contract "clearly delegated to Newport the decisions that are usually the focus of ESOP (employee stock ownership plan) stock-drop cases — the decisions to allow the plan and employees to continue to hold employer stock, and the decision to allow employees to continue making new investments in employer stock," the appeals court judges wrote.
"In making those decisions, Newport was not a Boeing insider," they added. "It was making decisions like any outside investor ... on the basis of public information about the company and its prospects."
Although the 7th Circuit only covers federal courts in Illinois, Wisconsin and Indiana, ERISA attorneys and DC consultants said the decision sent a message to sponsors as well as to potential plaintiffs.
"This almost reads like a law review article," said Stephen Rosenberg, a Boston-based partner for the Wagner Law Group, who represents sponsors in ERISA cases.
The appeals court's ruling plus the Supreme Court's Dudenhoeffer decision build an even tougher defense against stock-drop lawsuits, improving the odds that a complaint will be dismissed, he said. "After you get past the dismissal stage, you can spend a fortune in discovery — or you settle," said Mr. Rosenberg, referring to the data-gathering and data-sharing process that is necessary if a judge rejects a motion to dismiss.