Unlike the song “American Pie,” we doubt if anyone will pen a song lamenting the passing of ERISA’s presumption of prudence. In a unanimous decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ____, 134 S.Ct. 2459 (2014) (“Dudenhoeffer”), the U.S. Supreme Court rejected the “presumption of prudence” afforded to ERISA Employee Stock Ownership Plan (ESOP) fiduciaries holding company stock. The Supreme Court ruled that ERISA “does not create a special presumption favoring ESOP fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” Slip Opinion at p. 8. The disappearance of the “presumption of prudence” means plaintiffs must plausibly allege imprudence by a plan fiduciary charged with investment authority.
The Supreme Court opined that a successful complaint should allege an alternative action that the defendant fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary…. would not have viewed as more likely to harm the fund than help it.”
In doing so, the Supreme Court expressly embraced the “efficient market” theory of liability:
In our view, where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible under a general rule, at least in the absence of special circumstances. Many investors take the view that “they have little hope of out performing the market in the long run based solely on their analysis of publicly available information,” and accordingly they “‘rely on the security’s market price as an unbiased assessment of the security’s value in light of all public information.’” Halliburton v. Erica P. John Fund, Inc., ____ U.S. ____, ____ 2014 BL 172975 (2014) (slip op., at 11–12).
Id. at p. 16.
ERISA plaintiffs’ lawyers thus have a new hill to climb — framing ERISA fiduciary breach claims that comport with the insider trading restrictions contained in federal securities laws. The door was left open to plaintiffs, however, “A plaintiff could nonetheless plausibly allege imprudence on the basis of publicly available information by pointing to a special circumstance effecting the reliability of the market price as ‘an unbiased assessment of the security’s value in light of all public information.’” Dudenhoeffer, Slip Opinion at p. 10.
To make ERISA plans safe from “special circumstance” claims, employers should consider removing insiders from any positions that administer, operate or control a pension plan holding company stock.
A second alternative would be to appoint an independent fiduciary, who is not an insider, to be solely responsible for determining whether to retain employer stock in the pension plan.
A third variation to lessen “special circumstance” exposure would be to simply eliminate company stock as an employer matching or profit sharing contribution in the pension plan.
Importantly, the public information defenses suggested by the Supreme Court have a limited range-they only apply to EIAP’s holding the stock of publicly traded companies. For the thousands of ESOP’s funded by stock of companies that are not publicly traded, those fiduciaries must continue to attend to the particulars of their own procedural prudence so as to avoid being the subject of future judicial guidance.