I believe that it was Alfred Lord Tennyson who said, “In the summer a young compliance lawyer’s fancy lightly turns to thoughts of Form 11-K.” Yes, now is the time when many companies with a company stock fund in their 401(k) plan are required to file the Form 11-K. However, what some of these companies should be much more worried about is the litigation against corporate officers for their roles as 401(k) plan or employee stock ownership plan fiduciaries, which has taken off again after last year’s Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer.

I believe that it was Alfred Lord Tennyson who said, “In the summer a young compliance lawyer’s fancy lightly turns to thoughts of Form 11-K.”* Yes, now is the time when many companies with a company stock fund in their 401(k) plan are required to file the Form 11-K. However, what some of these companies should be much more worried about is the litigation against corporate officers for their roles as 401(k) plan or employee stock ownership plan (ESOP) fiduciaries, which has taken off again after last year’s Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer.

Background

As readers know, traditional securities fraud class action lawsuits against officers and directors nearly always follow a significant drop in a company’s stock price. A little over a decade ago, the plaintiffs’ class action bar also began suing ERISA plan fiduciaries, which nearly always included officers and directors, for breach of their fiduciary duty of prudent investing when the company’s stock price declined, since most public companies had by that point included a company stock fund investment option in their 401(k) plans or ESOPs. Plan participants constitute a ready-made class of individuals, creating the potential for large damage awards for any drop in stock price.

These stock drop lawsuits stalled in the 2010 – 2014 period, as the Court of Appeals for every federal circuit save one adopted the so-called “Moench presumption” (a presumption of prudence) in favor of the fiduciaries. In June 2014, the Supreme Court’s Dudenhoeffer decision expressly rejected the Moench presumption, opening the way for a new wave of class action lawsuits. Plaintiffs’ lawyers are riding that wave.

Action Items

The details of these decisions and lawsuits are beyond the scope of this article. However, the critical action item for corporate officers and directors is to remove themselves immediately from the role of plan fiduciary. ERISA is a personal liability statute.

There are three viable choices for corporation and fiduciaries to reduce the risk of lawsuit and liability from the company stock fund:

  1. Eliminate the company stock fund from the investment options under the company’s 401(k) or ESOP plan;
  2. Appoint an independent fiduciary for the company stock fund; or
  3. Draft and adopt detailed guidelines for plan fiduciaries as to the stock fund.

However, the first two steps all corporations should take to reduce the risk of potential liability to their officers and directors are:

  1. Remove from the plan fiduciary committee all Section 16 officers and others who tend to receive inside information; and
  2. Cause the company’s directors or compensation committee members to delegate away as much fiduciary authority (and potential liability) as possible.

*Or maybe it was “In the Spring a young man’s fancy lightly turns to thoughts of love”? Well, it was something like that.