The Court concluded that the Ninth Circuit Court failed, upon remand, to properly evaluate the complaint in light of the Court’s prior ruling in Fifth Third Bancorp v. Dudenhoeffer2 on prudent fiduciary pleading standards. The Ninth Circuit Court generally concluded that the complaint met the Fifth Third standards because the federal securities laws require plan fiduciaries to disclose material information and such disclosure plausibly could cause the stock price to decline more than it would have declined had the fiduciaries merely withdrawn the fund as an investment option as the participants alleged they should have done. However, as the Court found, it failed to assess whether the complaint itself “plausibly alleged” that a prudent fiduciary in the same position could have concluded that this alternative action (removing the stock as a plan investment option) would do less harm than good—rather than summarily concluding so. Finding no sufficient facts and allegations within the complaint to support the circuit court’s conclusion, the Court reversed and remanded to the district court to determine whether the plan participants may amend the complaint in order to adequately state a claim for breach of the duty of prudence under the Fifth Third standards.
Impact to Plans and Fiduciaries
The Court’s unwillingness to allow the circuit court to rely on general assessments of potential market conditions underscores the stringent pleadings standards the Court expects in these stock drop cases—not only for ESOPs (employee stock ownership plans), but also individual account plans that allow company stock as an investment option. The order is also another step in the continuing evolution of what, practically, constitutes adequate pleading in these cases. As always, plans and their fiduciaries should consider adopting a monitoring process to regularly evaluate whether the continued offering of an employer stock fund is prudent in appropriate cases, and also assess whether appointed plan fiduciaries will be privy to inside information.
Jackson Walker provides ERISA and insured benefits counseling and litigation services by skilled attorneys who have counseled and successfully defended employee benefit plans, insurers, third-party administrators and employers in disputes involving group and individual health, disability, life and retirement benefits.
Jackson Walker’s ERISA and insured benefits team includes the following attorneys:
Jim Griffin – 214.953.5827 – jgriffin@jw.com
Chuck Campbell – 512.236.2263 – ccampbell@jw.com
Scott McElhaney – 214.953.6147 – smcelhaney@jw.com
Paula Denney – 713.752.4332 – pdenney@jw.com