Supreme Court Clarifies Duty of Prudence for ESOP Fiduciaries

Under ERISA, §1104(a)(1)(B) imposes a duty of prudence on pension plan fiduciaries. This duty is accompanied by the requirement to diversify investments. These obligations are altered, however, for employee stock ownership plans (ESOP); §1104(a)(2) states that to the extent that the duty of prudence requires diversification, the duty is not violated by acquiring or holding company stock. In Fifth Third Bancorp v. Dudenhoeffer (2014 WL 2864481), former employees and ESOP participants alleged that Fifth Third Bancorp (FTB) and its officers breached the duty of prudence under ERISA. The complaint stated that the fiduciaries knew or should have known that FTB stock was excessively risky and overvalued, based on both public and inside information. The duty of prudence, they alleged, was violated by continuing to hold and purchase company stock when they should have sold the stock, refrained from purchasing more, and/or disclosed the negative information to reflect the true value.

The Supreme Court held that ESOP fiduciaries acquiring company stock are not liable for losses that result from a failure to diversify, but they are still subject to a duty of prudence. A breach of the duty of prudence must allege that an alternative lawful action existed for the fiduciary, and a prudent fiduciary would believe that the action was not more harmful than helpful. Imprudence will not be found on allegations of failing to trade stock based on insider information that would violate insider trading.  The Court directed to lower courts to consider whether the fiduciary could have made the not the more harmful than helpful determination.

The case was remanded to determine whether a claim was properly alleged.