Just when we thought so-called “ERISA stock-drop” lawsuits were on their last leg, they may not be, at least in the Sixth Circuit. These cases typically are brought against the fiduciaries of company-sponsored defined contribution retirement plans (such as 401(k) plans) that hold employer stock as a plan investment, for declines in value of plan participants’ accounts resulting from “drops” in the value of employer stock credited thereto. In such cases, plaintiffs allege breaches of fiduciary duties for failure to prudently manage the plan’s investment in employer stock, failure to monitor the plan’s assets and failure to adequately inform plan participants of the risks of the employer stock as a plan investment.

Courts across the county have become increasingly reluctant – absent extraordinary circumstances – to permit these lawsuits to proceed based on an ERISA fiduciary’s decision to maintain investments in employer stock, especially where the plan’s terms require it. The recent dismissal of the ERISA stock-drop case brought in Texas against BP fiduciaries is just one example. In Re: BP p.l.c. ERISA Litig., No. 4:10-cv-4214 (S.D. Texas). If not dismissed, these lawsuits, frequently filed on the heels of shareholder class actions, are expensive and time consuming to defend.

On July 23, 2012, the Sixth Circuit decided Griffin v. Flagstar Bancorp, Inc., No. 11-1497 (6th Cir. 2012). The underlying allegations by certain participants in the company’s 401(k) plan were similar to those in other “stock-drop” lawsuits of this type: various fiduciaries allegedly breached their duties under ERISA by allowing employer stock to be offered as a 401(k) plan investment option while the company was facing a precarious financial situation.

The district court dismissed the lawsuit, but the Sixth Circuit reversed, relying on its precedent-setting decision earlier this year in Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012). There, the court held that the “presumption of prudence” applicable to ERISA fiduciaries is evidentiary in nature and does not apply at the initial (pleading) stage of the lawsuit. Even when plan participants control the allocation of their retirement plan assets among an array of investment options, fiduciaries are not exempt from their duty to use prudence when designating and monitoring the menu of different investment options that plans offer.

Relying on Pfeil, the Griffin court held that because defendants decided to offer Flagstar stock to plan participants, ERISA’s “safe harbor” (Section 404(c)) provision was not available to them and dismissing the lawsuit was not appropriate. The Sixth Circuit concluded that “[a]fter reviewing the factual allegations in the complaint – which go far beyond documenting a simple drop in stock price to recite announcements from Flagstar itself, statements by analysts and financial media publications, and actions taken by Flagstar suggesting a precarious financial situation– we must conclude that the complaint raises a plausible claim for breach of fiduciary duty.”

These decisions leave unanswered questions. For example, when must employer stock be removed as an investment option? How precarious must the company’s financial outlook be? Is diversification always necessary? How much or how little company stock should a plan ideally hold? Will fiduciaries of tax-qualified employee stock ownership plans and other individual account plans (such as 401(k) plans) that hold employer stock be entitled to a presumption of reasonableness at later stages in Sixth Circuit stock-drop cases?

Pfeil and Griffin could result in the Sixth Circuit becoming a favored venue for the plaintiffs’ bar in these types of cases