The U.S. Supreme Court on Monday asked the U.S. Solicitor General's office to comment on a case that seeks to determine how a defined contribution plan's offering of a non-employer's stock as an investment option should be treated by ERISA.
Company stock funds via employee stock ownership plans don't violate ERISA's requirement that DC plan menus be diversified. However, the law is unclear on whether non-employer stock is considered undiversified for ERISA's purposes.
The justices have asked for the government's view in a petition they are mulling — Gannett Co. Inc . et al. vs Quatrone.
The publicly traded Gannett offers company stock in its 401(k) plan, but it also held stock in its former parent, TEGNA, after Gannett was spun off in June 2015.
Mr. Quatrone, a plan participant, sued Gannett, saying plan fiduciaries should have sold the plan's TEGNA holdings "on or shortly after" the spin-off, according to court records. He said the plan's keeping non-employer stock violated ERISA's prohibition against undiversified investments.
Gannett responded that the TEGNA stock should be viewed in the context of all the Gannett 401(k) plan investment options. After the spin-off, plan participants could divest the TEGNA stock but they couldn't buy more.
Asking for the federal government's view — in this instance Acting Solicitor General Elizabeth Prelogar — is a common request by the Supreme Court. There is no timetable for a response.
Mr. Quatrone sued Gannett in March 2018. He sold his TEGNA stock during the first half of 2016, according to court records. Gannett plan fiduciaries said July 1, 2017 that the plan would liquidate its TEGNA stock by July 1, 2018, according to court records.
U.S. District Judge Anthony J. Trenga, Alexandria, Va., dismissed Mr. Quatrone's complaint in September 2018. The judge wrote that "the duty to diversify requires diversity among the full set of funds offered in the menu of plan offerings but does not compel every individual fund in a plan to be diversified," according to court records.
The U.S. Court of Appeals for the Fourth Circuit, however, in a 2-1 vote in August 2020, reversed the ruling and sent the case back to the district court.
"Plaintiffs have plausibly alleged defendants breached their duty of prudence and caused a loss to the plan," the judges said.
"Because defendants did not monitor the merits of the fund, they did not uncover that it was an imprudent fund," they wrote, referring to the TEGNA stock. "As the fund was a single-stock fund with inherent concentration risk, it is plausible that the fund was, in fact, imprudent."
Gannett petitioned the Supreme Court in October 2020 to review the case "to clarify fiduciaries' obligations and ERISA's requirements" and to determine "whether the duty of diversification applies at the fund level."