As the U.S. Supreme Court reviews another ERISA-based challenge to company-stock management in 401(k) plans, many sponsors have acted to reduce their litigation risk in stock-drop cases.
ERISA attorneys and defined contribution consultants say sponsors that outsource management of company stock to independent fiduciaries or who keep high-ranking insiders off oversight committees have a better chance of avoiding — or at least prevailing in — stock-drop lawsuits.
"Litigation risk is the No. 1 factor for companies selecting an independent fiduciary for company stock," said Nancy Ross, a Chicago-based partner and co-chair of the ERISA litigation practice of Mayer Brown LLP.
"Companies that are bitten once are inclined to hire independent fiduciaries," said Ms. Ross, adding that hiring an independent fiduciary can be a condition of an ERISA lawsuit settlement.
The case now before the Supreme Court, Retirement Plans Committee of IBM et al. vs. Larry Jander et al., highlights the dilemma faced by corporate executives who also serve as fiduciaries for their 401(k) plans.
In their DC plan roles, they must follow ERISA rules governing prudence of management and loyalty to participants. These rules were interpreted by the Supreme Court's unanimous decision in 2014 that established guidelines for lower courts to determine if a stock-drop complaint should be dismissed or allowed to go to trial.
But in their corporate roles, executives must follow the rules of the Securities and Exchange Commission regarding insider informa- tion. The Supreme Court said a fiduciary cannot violate securities laws in managing a company-stock fund in a DC plan. It also said that fiduciaries' inaction, "based on negative inside information," must be weighed by lower courts in balancing an "ERISA-based obligation" vs. potential conflict "with the complex insider trading and corporate disclosure requirements" in federal securities laws.
The intersection of the SEC rules and ERISA has led to clashes of legal interpretations. In June, the Supreme Court agreed to hear the case. Oral arguments were held Nov. 6. A decision is expected next year.
Annual research by Callan LLC shows that the hiring of independent fiduciaries by DC plans with company stock has grown during this decade. Despite yearly variations in the Callan surveys, the overall trend reveals greater use of independent fiduciaries over time — from a low of 12.5% in 2011 to a record 37.5% in 2019. (Callan's annual surveys cover clients and non-clients. The numbers and names of the respondents vary from year to year.)