Prior to 2014, most courts had recognized an unwritten presumption that favored having a company’s 401(k) plan invest in the publicly traded stock of the employer. However, in mid-2014 the Supreme Court struck down that presumption. Recognizing that its ruling could open the floodgates of litigation against an employer that held company stock in its 401(k) plan—especially when that stock’s value declines—the Supreme Court included a series of hurdles that potential plaintiffs would need to overcome in order for a so-called 401(k) stock-drop suit to survive. For reference, the allegation in a 401(k) stock-drop is that a breach of fiduciary duty occurred by allowing 401(k) plan participants to continue to invest their accounts in company stock.

Prior to 2014, complaints in 401(k) stock-drop suits generally alleged that the plan fiduciaries should have known that the plan’s stock was overvalued and should have divested, or at least should have stopped allowing additional funds to be invested in the overvalued stock. In Fifth Third Bancorp v. Dudenhoeffer, 573 US ___ (2014), the Supreme Court recognized that if plan fiduciaries divested or prohibited new investment in company stock based on insider information, then they would be violating securities laws. The court also ruled that such a violation was not mandated by the Employee Retirement Income Security Act (ERISA), the primary law at issue in most 401(k) stock-drop suits.

Dudenhoeffer made clear that lower courts should dismiss a 401(k) stop-drop suit unless the plaintiff’s complaint alleges a course of action that the plan fiduciaries could have taken that (a) would not have required a violation of securities laws, and (b) could also not plausibly be viewed by a prudent fiduciary as more likely to harm the plan than to help it. As an example, the court noted that having a 401(k) plan cease future purchases of company stock could send a signal to the market that the stock is overvalued and cause the stock price to fall. As a result, ceasing future purchases may plausibly be viewed by a plan fiduciary as doing the plan more harm than good.

In a recent opinion, the Supreme Court had its first opportunity to review a 401(k) stock-drop suit in light ofDudenhoeffer. In Amgen, Inc. v. Harris, 577 US ___ (2016), the lower court found that the complaint plausibly alleged that removing company stock as an investment alternative in the 401(k) plan would not have caused undue harm to the plan. As a result, the lower court found that the allegations of a fiduciary breach should survive a motion to dismiss.

The Supreme Court reversed because the lower court incorrectly limited its examination to whether the complaint plausibly alleged that removing the stock fund as an investment alternative would not cause undue harm to the plan. The Supreme Court ruled that the analysis should have also included a determination of whether the complaint plausibly alleged that no prudent fiduciary could have concluded that eliminating the stock fund as an investment alternative would do the plan more harm than good.

Based on Dudenhoeffer and Amgen, it is clear that the Supreme Court believes that requiring specific, plausible allegations in the plaintiff’s complaint will help avoid frivolous 401(k) stock-drop suits from surviving beyond a motion to dismiss. However, it is likely that future plaintiffs will use the road map provided in those cases to craft complaints that are likelier to survive a motion to dismiss in hopes of reaching a settlement or receiving a favorable judgment.

In the meantime, sponsors of 401(k) plans that include employer stock should continue to monitor the appropriateness of continued investment in that stock, and should consider adopting procedures that can be used to more objectively determine when divestiture or other actions may be appropriate.