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February 12, 2014 at 07:52 AM
All eyes in the retirement plan industry are focused on the U.S. Supreme Court, awaiting a decision that might have wide ramifications for companies that offer their own stock as an investment choice in 401(k) accounts. Arguments will begin in March.
At issue in Fifth Third Bancorp v. Dudenhoeffer is whether the presumption that employers act prudently when offering their own stock will remain a guiding principle. The 6th Circuit Court of Appeals ruled, contrary to other courts, that there is no such presumption.
“The presumption lifts the burden of proof,” said Nancy G. Ross, a partner with the Chicago law firm McDermott Will & Emery. “The participant has to prove [an employer’s action] wasn’t prudent.”
If that presumption that a company acted prudently is removed, such cases could move to the discovery stage without a plaintiff having shown any hard evidence of a breach of fiduciary duty. The costs could run into the hundreds of thousands of dollars.
“Changing the rule would be antithetical to Congress making it palatable for companies to offer retirement plans,” Ross said.
There’s more than one view on the issue, of course. Attorneys who bring the suits see the need to examine company records to find out just how decisions were made. And they aren’t having any of the talk that tinkering with the case law would be an unfair burden to companies.
“The bottom line is it will be an important case,” said Jerome J. Schlichter, senior partner at Schlichter Bogard & Denton in St. Louis. If the rule is changed “it will just mean that employers have to do [regarding company stock] what they have to do with any investment they want to include” in a retirement plan. That means ensuring they fulfill their fiduciary duty.
The battle lines have been drawn with those on each side of the case filing briefs with the court.
The Department of Labor, for instance, urged the court to uphold the decision. On the other hand a group of trade associations including the U.S. Chamber of Commerce and the Plan Sponsor Council of America have taken up the banks’ cause.
“Obviously, we believe that the 6th Circuit erred when it diverged from other circuits,” said Ed Ferrigno, vice president of Washington affairs for the council.
Since Congress passed the Employment Retirement Income Security Act of 1974, that presumption has gained traction. It balanced the desire of Congress to offer protection to employees while offering employers an incentive to encourage stock ownership in their company.
So-called stock drop cases, filed by participants when the company stock price falls significantly, have been around for two decades, but the stock market’s problems during the Great Recession were a catalyst for more of them.
Nearly all the cases were decided on the basis of a 1991 decision by the U.S. 3rd Circuit Court of Appeals in Philadelphia. In Moench v. Robertson, the court ruled in a case brought by Charles Moench, an employee of Statewide Bancorp, an Employee Stock Ownership case.
