ESOP Beneficiaries Are Entitled to More than “Coach Class” Fiduciary Duties

Posted on: June 25th, 2014 by Keith Dubanevich

Today, the U.S. Supreme Court ruled that Employee Stock Ownership Plan (“ESOP”) fiduciaries are not entitled to a special presumption of prudence.  Rather, they should be held to the same duty of prudence as other ERISA fiduciaries.  Fifth Third Bancorp et al v Dudenhoeffer et al.

This case was argued on April 2, 2014 and involves a defined contribution plan.  The employer initially made contributions into the company stock fund and, if an employee later wanted to, s/he could transfer the money into other assets.  Most employees followed the advice of the fiduciaries and left their money in company stock.

The stock fund held more than 100 million shares of Fifth Third Bank stock. The stock price eventually dropped 74%. The complaint alleged conflicts of interest and failures to take appropriate measures to diversify the portfolio.  The district court dismissed the case, finding that, to overcome the presumption of reasonableness, the plaintiffs had to allege a “dire financial predicament.”

The Court of Appeals for the Sixth Circuit reversed, relying on Ashcroft v. Iqbal.  That case requires only that the complaint contain sufficient factual matter, which, if accepted to be true, would state a claim for relief that is plausible on its face.  The fiduciaries appealed.

The Supreme Court rejected the fiduciaries’ argument that they were entitled to a presumption of prudence.  Indeed, at argument Justice Kennedy queried whether investors in an ESOP are entitled to only “coach class” fiduciary duties.  Today’s decision concludes that ESOP beneficiaries are entitled to state a claim for breach of the duty of prudence and that the fiduciaries are not entitled to any special presumption.