On June 25, 2014, the United States Supreme Court held that fiduciaries of employee stock ownership plans ("ESOP") are not entitled to a presumption that their decision to invest in employer stock is prudent. Rather, the Court held, ESOP fiduciaries are subject to the same duty of prudence as all other ERISA fiduciaries, except that ESOP fiduciaries need not diversify plan assets. See Fifth Third Bancorp v. Dudenhoeffer.
In Dudenhoeffer, the defined contribution plan sponsored by Fifth Third Bancorp ("Fifth Third") offered participants the ability to direct their retirement accounts into any of 20 separate funds, including both mutual funds and an ESOP. Participants in Fifth Third's plan are able to direct their own contributions into any of the offered funds. However, employer matching contributions are automatically invested in the ESOP. Plan participants could then move the employer matching contributions to any of the other offered funds.
Participants in the Fifth Third plan alleged that the plan's fiduciaries violated ERISA's duties of loyalty and prudence by investing in the ESOP even though the fiduciaries should have known that Fifth Third's stock was "overvalued" and "excessively risky." The participants argued that, upon learning of the precarious position of the Fifth Third stock, a prudent fiduciary would have (in some combination) (1) sold the holdings in the ESOP, (2) refrained from investing in the ESOP, (3) cancelled the plan's ESOP option, or (4) disclosed insider information that would have allowed the market to correct the price of Fifth Third's stock.
In confirming that ESOP fiduciaries are subject to ERISA's general prudence standard, the Court held that the only fiduciary duty that does not apply to ESOP fiduciaries is ERISA's requirement to diversify plan investments. Additionally, the Court held that this exception is not broad enough to completely remove the duty of prudence. The Court recognized that applying the general fiduciary standard to ESOP fiduciaries might lead to complications with otherwise applicable laws related to insider trading. However, the court determined that insider trading concerns apply similarly to all ERISA fiduciaries.
Finally, the Court held that publically available information is not sufficient to show that ESOP fiduciaries should have known that continued investment in employer stock is not prudent, absent some other special circumstance. Rather, plaintiffs attempting to show a breach of fiduciary duty based on publically available information would also have to show some "special circumstance" showing a breach. Additionally, the Court held that the insider information that the ESOP fiduciaries likely had would not necessarily be sufficient to support a claim for breach of fiduciary duty.