U.S. Supreme Court Clarifies the Scope of ERISA Fiduciary Obligations in Recent Stock Drop Decision
February 2, 2016
In recent years, plaintiffs’ lawyers have brought numerous ERISA breach of fiduciary duty lawsuits against employers that offer employer stock funds in their 401(k) plans. These lawsuits are typically brought on behalf of plan participants who have lost money because the value of the company’s stock has dropped. For many years, plaintiffs faced uphill battles in these so-called “stock drop” suits as most federal appellate courts adopted a “presumption of prudence” that favored plan fiduciaries’ decisions with respect to the continued inclusion of company stock in 401(k) plans. In 2014, in Fifth Third Bancorp v. Dudenhoeffer, the U.S. Supreme Court weighed in on this issue and eliminated this presumption of prudence.
With Dudenhoeffer, the Supreme Court seemingly tilted the law in favor of plaintiffs in these stock drop suits. In Dudenhoeffer, the Supreme Court held that fiduciaries responsible for administering employer stock funds are generally subject to the same fiduciary standards as all other ERISA fiduciaries. However, a decision on a recent appeal to the Supreme Court clarified that Dudenhoeffer still imposes a high bar on plaintiffs in these suits.
In Harris v. Amgen, the Supreme Court held that the Ninth Circuit failed to properly apply the new Dudenhoeffer standard when it failed to evaluate whether the plaintiff’s complaint plausibly alleged that a fiduciary in the defendant’s position could not have concluded that removing the Amgen stock fund from the list of investment options would not cause more harm than good to the stock fund. For employer stock fund fiduciaries defending stock drop claims, this decision suggests that plaintiffs may continue to struggle to allege a plausible alternative action that plan fiduciaries should have taken, when, as the Supreme Court explained, a company’s decision to halt trading in the stock fund could compound participant losses by sending a signal to the markets that the company itself views its own stock as a bad investment.