The United States Supreme Court reaffirmed in Amgen v. Harris the pleading standards to be applied by the federal courts in reviewing a claim alleging breach of fiduciary duty in connection with an employer stock fund when the fiduciaries have “inside” information.[1]

The Court in Amgen re-affirmed its prior holding in Fifth Third Bancorp v. Dudenhoeffer[2] that fiduciaries of retirement plans with an employer stock fund generally will be held to the same duty of prudence that applies to all fiduciaries of retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA).[3]

However, the Court again acknowledged, as it had in Fifth Third, that determining whether a complaint has sufficiently alleged a breach of the duty of prudence in the context of a plan holding employer stock is often difficult, given the potential tension between the Congressional intent to encourage the creation of employee stock-ownership plans and ERISA’s duty of prudence. 

Recognizing this, as well as the potential for conflict between ERISA and securities laws when fiduciaries are alleged to have imprudently failed to act on inside information, in Fifth Third, the Court provided standards to help “divide the plausible sheep from the meritless goats.”  In Amgen, the Court reversed and remanded because the Ninth Circuit failed to assess whether the complaint met the Fifth Thirdpleading standards. 

The Amgen case emphasizes two important points when a plan participant sues and challenges a fiduciary’s action or inaction with respect to an employer stock fund on the basis of “inside” information:

  • The Fifth Third standards are motion to dismiss pleading standards.  The participant’s complaint must allege an alternative action that the plan fiduciaries could have taken that would have been consistent with applicable securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.
  • A court must determine in its review of the participant’s complaint whether it plausibly alleges that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases of the employer stock or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock.

The bottom line

Although in theory fiduciaries of plans holding employer stock are held to the “same duty of prudence that applies to ERISA fiduciaries in general,” in practice, under Fifth Third and Amgen, they are subject to a different pleading standard. 

Fiduciary considerations

Plan sponsors should continue to be vigilant in maintaining their fiduciary prudence in monitoring all aspects of maintaining an employer stock fund within a retirement plan, and may want to give attention to the following considerations:

  • Review the composition of the committee charged with oversight of the retirement plan and consider the potential conflict of certain officers and employees who may have “inside” information.  For example, should the committee consist of a company’s chief financial officer, in-house attorneys or employees with inside knowledge of key aspects of the company?
  • Provide regularly scheduled and documented fiduciary training programs for committee members.
  • Confirm that committee meetings are held on at least a quarterly basis.  Written agendas should be presented at each meeting.  Generally, the first order of business at each meeting should be approval of the prior meeting’s minutes.
  • Request that the treasury department or the retirement plan’s investment advisor provide the committee with performance information regarding the employer stock fund as well as all other demographics of the employer stock fund (i.e., number of participants invested in the stock fund, number of participants solely invested in the stock fund, percentage of the plan invested in the stock fund, cash position of the stock fund and number and size of trades in the stock fund)
  • Focus on having a strong committee meeting process (e.g., research, investigation, and discussion-oriented) that catalyzes the committee to engage in reasoned decision making, consistent with that of a prudent person acting in like capacity, before making an investment decision.

Over the last several years, retirement plan sponsors have been attempting to eliminate the fiduciary risk posed by allowing plan participants to investment in company stock.  The decision to eliminate an employer stock fund can also pose fiduciary risk unless the fiduciaries follow a prudent process in reaching and implementing that decision. 

Finally, plan fiduciaries can also consider various alternatives for limiting the potential exposure that results from offering employer stock as an investment alternative, including:

  • Freezing further investment in the employer stock fund while allowing the participant to keep his or her current holdings in the employer stock fund.
  • If possible to implement, establishing a limit on the percentage of employer stock held by a participant.