Recent litigation involving claims for breach of fiduciary duties in connection with the offer of employer stock as a retirement plan investment option produced mixed results and reflects a developing split in the federal circuit courts. In the Second Circuit, the Court of Appeals recently affirmed a decision to dismiss claims that the investment committees of two retirement savings plans and their members had breached their fiduciary duties of prudence and loyalty in communication by retaining employer stock as an investment option. Because the terms of the retirement savings plans strongly favor an investment option in employer stock, the court held that plaintiffs must plausibly plead the employer faced a “dire situation” to state a claim that plan fiduciaries abused their discretion in continuing to offer the employer stock fund as an investment and in failing to liquidate employer stock already held. The court held that plaintiffs in the case failed to meet that burden, notwithstanding the plaintiffs’ allegations of mismanagement leading to criminal prosecutions, civil settlements, fines, and a 30 percent drop in the value of employer stock. The presumption of prudence does not require the employer stock to have performed optimally. The dismissal of the claim for breached duty of loyalty in communication was also affirmed because the communications cited by the plaintiffs, including certain SEC filings incorporated into the summary plan descriptions (SPDs), were not made by the plan sponsor “in its capacity as plan administrator,” and thus were not actionable as misstatements under ERISA. (In re Glaxosmithkline ERISA Litigation; 2d Cir. 2012)

In the Sixth Circuit, the Court of Appeals recently reached a decidedly different conclusion when it reversed a decision at the federal trial court level to dismiss a claim for breach of fiduciary duties when the fiduciaries of a 401(k) plan with an employee stock ownership plan (ESOP) component continued to invest in and hold employer stock despite the stock’s precipitous decline in value. In essence, the Sixth Circuit reaffirmed its stance that the presumption of prudence does not apply at the motion to dismiss stage. Without the presumption of prudence, the court was left to decide whether the plaintiffs were successful in pleading (i) facts that plausibly allege a fiduciary breached its fiduciary duty and (ii) a causal connection between that breach and the losses suffered by the plan. Here, the court found that the burden was satisfied by the plaintiffs’ allegations that the plan sponsor engaged in lending practices that were equivalent to participation in the subprime lending market, that defendants were aware of the risks of those investments, and that those risks made employer stock an imprudent investment, as evidenced by an alleged 74 percent drop in the price of employer stock. The dismissal of the claim for breach duty of loyalty in communication was also reversed. The court ruled that the plaintiffs’ complaint plausibly alleges defendants breached their fiduciary duties by intentionally incorporating the employer’s SEC filings into the plan’s SPD, thereby conveying misleading information to plan participants. The court held the SPD is a fiduciary communication to plan participants, and selecting the information to convey through the SPD is a fiduciary activity. (Dudenhoefer v. Fifth Third Bancorp; 6th Cir. 2012)