Stock Drop

After a few years of decline, litigation involving 401(k) plans “has surged again recently,” according to a study published by the Center for Retirement Research at Boston College.  This is likely not news to 401(k) sponsors and service providers, who are confronted with this reality on a near daily basis.  However, the study is a fascinating read, in part because it chronicles many cases brought since 2006, but also because it discusses the consequences of all this litigation—both the good and the not-so-good.

Complaints filed by participants of 401(k) plans against their plan fiduciaries over the past ten years follow a pattern.  Section 401(k) plan litigation exploded during the recession in 2008, with many allegations targeting funds holding employer stock whose value plummeted.  The number of lawsuits peaked at 107 in 2008, and 2009 remains second on the list for number of 401(k) lawsuits filed over the past 12 years.

Section 401(k) litigation tapered off during the first few years of this decade, with the Supreme Court’s 2014 Dudenhoeffer v. Fifth Third Bancorp decision delivering a devastating blow to the so-called “stock drop” cases.[1]

Although the Court agreed with the Sixth Circuit that employer stock ownership plan (ESOP) fiduciaries are not entitled to a special “presumption of prudence,” its discussion of the difficulty such allegations faced in meeting the pleading standard led to many dismissals.

But starting around 2015, the study finds, 401(k) litigation began to surge again.  The more recent cases focus on “excessive fees” paid either for actively managed investment funds or for record-keeping and other administrative services.  There has been a corresponding shift in who is sued: record-keepers, third-party administrators, and other plan service providers are increasingly named as defendants, in addition to or instead of the employees or fiduciary committees of plan sponsors.  The plaintiffs in many of these “excessive fees” cases probe the complicated—and sometimes opaque—fee structures between plan service providers such as record-keepers and investment advisors for what plaintiffs believe to be hidden kickbacks.Continue Reading ERISA Litigation Surging – Focus on Fees

As noted in our earlier blog post, the U.S. Supreme Court’s 2014 decision Fifth Third Bancorp v. Dudenhoeffer made clear that participants bringing stock-drop cases are subject to heightened pleading standards to help “divide the plausible sheep from the meritless goats.”

In its first substantive ruling in a post-Dudenhoeffer stock-drop case, the U.S.

Yesterday, the Supreme Court issued its much anticipated decision in the stock-drop case, Fifth Third Bancorp v. Dudenhoeffer.  The Court vacated the lower court decision that was adverse to the employer, Fifth Third Bancorp, and remanded the case to the lower courts for further proceedings.

Fiduciaries of employee stock ownership plans (ESOPs) had hoped that this decision would clarify their responsibilities for administering an employer stock fund.  Although the decision leaves many questions unanswered, it does provide useful guidance for fiduciaries administering an employer stock fund in an ESOP:
Continue Reading Stock-Drop Decision Helpful to ESOP Fiduciaries

The Seventh Circuit’s recent decision in White v. Marshall & Ilsley Corp. awarded another early-round victory to employers in ERISA stock-drop litigation.

The plaintiffs in this case sought to recover losses in the M&I Bank 401(k) Plan’s stock fund that were attributable to a 54% decline in the market price of M&I stock that occurred during the financial crisis of 2008 and 2009.  The district court granted M&I’s motion to dismiss the plaintiffs’ misrepresentation and imprudent investment claims, but the plaintiffs appealed only the dismissal of their imprudent investment claims.

The Seventh Circuit affirmed the district court’s judgment.  Consistent with rulings by the Second, Third, and Eleventh Circuit (and contrary to a ruling by the Sixth Circuit), the Court ruled that the presumption of prudence adopted by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) applied at the pleading stage as a substantive standard of conduct and that the presumption was not an evidentiary standard to be applied at the summary judgment stage, as urged by the plaintiffs and their amicus, the Secretary of Labor.
Continue Reading Employers Continue to Prevail in Stock Drop Litigation

Many appellate courts have ruled that fiduciaries who allow plan investment in employer stock are entitled to deferential judicial review or a “presumption of prudence” when the plan document requires or encourages the offering of employer stock as an investment option.  But a new Second Circuit decision demonstrates that references to an employer stock fund in the plan document may not sufficiently “encourage” that option to give rise to the presumption.  Taveras v. UBS AG, No. 12-1662 (2d Cir. Feb. 27, 2013).
Continue Reading When Does a Plan Document “Encourage” an Employer Stock Fund Enough to Justify the Presumption of Prudence?