Supreme Court asked to clarify company stock issue in 401(k) plans
DOL challenges presumption of prudence in stock-drop cases
Published: November 25, 2013 - Pensions & Investments
Scott Macey believes fear of litigation could lead many
companies to eliminate the stock option.
The appeal of company stock as an investment option in defined contribution
plans could dim considerably if the Department of Labor succeeds in having the
U.S. Supreme Court revisit the issue of fiduciary prudence in managing that
option.
The department's petition to the Supreme Court, filed Nov. 12 by the U.S.
solicitor general's office to hear a Fifth Third Bancorp case, seeks to take
advantage of a recent split in judicial circuits that could make it easier for
participants to challenge employers when company stock loses value.
If the high court accepts the case this session, as is widely expected, it
could have a chilling effect on plan sponsors, but it might also resolve
inconsistencies from lower court rulings, said Fifth Third Bancorp spokesman
Larry Magnesen, based in Cincinnati. gWe were glad to hear that the solicitor
general has recommended that the U.S. Supreme Court hear this case.h
Scott Macey, president and CEO of the ERISA Industry Committee in Washington,
which represents corporations on benefit issues, said: gMany, many plans across
the country have employer-shares funds. If they have to worry about the constant
threat of litigation because of variations in stock prices, I can see them
getting scared away.
gThen you're just inviting the plaintiffs' bar to file lawsuits anytime there
is a drop in the stock. And in a lot of cases (scaring companies away) will be
to the detriment of the employeesh who like owning part of their company, he
said.
DOL officials recognize employers' concerns of increased litigation, but
counter that such lawsuits will still require strong evidence, while weak cases
risk sanctions and court costs. gIf all you've got is a market drop, that's
absolutely not a case,h said a DOL official who declined to be identified.
gERISA gives (participants) ready access to the courts. People need to be
permitted to make their case.h
In many stock-drop cases, district and appellate court judges have supported
the companies, ruling a fiduciary overseeing the company stock option is
entitled to a gpresumption of prudenceh unless a breach of fiduciary duties can
be shown or the company is in a dire economic situation.
gGenerally the court cases have been favorableh to plan sponsors, said Ed
Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of
America. gCongress has always recognized the need to balance the interestsh of
employee ownership and participant protection, he said.
That began to change after a September 2012 ruling from the U.S. Court of
Appeals for the 6th Circuit in Cincinnati. That ruling revived a proposed class
action by participants in Fifth Third's 401(k) plan against Cincinnati-based
Fifth Third Bancorp.
Ruling in Dudenhoeffer vs. Fifth Third Bancorp et al., the appeals court
acknowledged rulings by other circuits that an employee stock plan fiduciary's
decision to remain invested in company stock gis presumed to be reasonable,h but
said that presumption does not apply at the initial stage of a case, despite
opposite conclusions reached by other circuits.
Plaintiffs in the case against Fifth Third alleged the bank's 401(k) plan
fiduciaries breached their duties by allowing participants to continue to invest
in the company's stock when its value plummeted by 74%, in part because of the
bank's subprime mortgage lending practices.
While stock-drop class actions often lead to settlements to avoid expensive
litigation, even when the presumption of prudence is not applied, they have
produced few legal victories for plan participants. If the Supreme Court accepts
the petition, the case ghas real potential to upset the apple cart in a big
way,h said Jeremy Blumenfeld, an attorney in the Philadelphia office of Morgan,
Lewis & Bockius LLP, which handles similar cases for plan sponsors but isn't
involved in this one.
The judicial split created by the 6th Circuit ruling led Fifth Third Bancorp
to appeal the decision to the Supreme Court, which in March asked the government
to weigh in on the case. While the court has declined to review numerous other
stock-drop cases, the difference this time is that the solicitor general is
doing the asking, on behalf of the Department of Labor, and at the behest of the
Supreme Court.
DOL officials declined to comment on the recent petition. But in
friend-of-the-court briefs filed in similar cases — involving Citigroup Inc. and
The McGraw-Hill Cos. — DOL officials warned that the other lower court rulings
were ga windfall for fiduciariesh who would no longer have the expense of
complying with ERISA-mandated prudence obligations, and could gput hundreds of
billions of dollars in pension plan assets at undue risk.h
gIt appears the 6th Circuit has taken what DOL has said to heart,h said
Thomas E. Clark Jr., chief compliance officer at FRA/PlanTools LLC, a fiduciary
consulting firm in Charlotte, N.C.
In their petition to the Supreme Court, Solicitor of Labor M. Patricia Smith,
Solicitor General Donald Verrilli, Jr. and staff attorneys argue the presumption
of prudence does not apply in stock-drop cases.
gERISA's text and purposes do not call for application of a presumption at
any stage of the proceedings,h the petition states. While the Fifth Third
participants will have to substantiate their allegations at subsequent stages of
the case, gtheir well-pleaded, plausible allegations suffice to state a claim,h
the government lawyers wrote.
gWe don't think any special presumption should apply to investors in company
stock,h said the DOL official. He noted the justices are not influenced by lower
court rulings.
For Mr. Clark, a former ERISA litigator, the case is part of ga significant
shift in thinking by industry experts that company stock investment funds are no
longer worth the risk. Compared to other investment options in a plan, a company
stock fund requires a higher level of due diligence, given the higher potential
for inherent conflict of interest,h said Mr. Clark.
gYou're doing a disservice to yourself as a fiduciary and your plan's
participants if the fund is kept blindly. Its continued inclusion should meet a
well-documented and well-considered goal.h
A Supreme Court resolution would provide some much-needed guidance.
gIf they take this case,h said Mr. Clark, gwe will get a resolution to an
issue that has been outstanding for the last 20 years.h
Original Story Link: http://www.pionline.com/article/20131125/PRINT/311259970/supreme-court-asked-to-clarify-company-stock-issue-in-401k-plans-dol-challenges-presumption-of-prudence-in-stock-drop-cases
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