Warner Partner Mary Jo Larson wrote article “Look Out Below” featured in Best Lawyers® about how employee 401(k) and other pension plans that include company stock can be a financial minefield. Many businesses offer or mandate company stock as an investment option for employees in their retirement plans. The reason for doing so is clear: Those same staffers are working for the betterment of the business and therefore have skin in the game. The better the company does, the better they do. However, when company stocks suffer significant loss – these same plans can be ripe for lawsuits.
In these cases, commonly referred to as “stock-drop” litigation, retirement-plan participants sue plan fiduciaries, including their plans’ investment committees, typically arguing that the fiduciaries had sufficient information to avoid, or at least dampen, the negative impact from the stock’s decline. This creates a high-risk environment for fiduciaries, even when employer stock is a required option under the company plan.
Many cases in this area are being filed and litigated, although recent court decisions have made it more difficult for plaintiffs’ stock-drop claims to succeed. The key decision was a 2014 U.S. Supreme Court ruling in Fifth Third Bancorp v. Dudenhoeffer. Before this case, if the plan document required employer stock to be offered, lower courts applied a presumption that the fiduciaries acted prudently in continuing to follow plan terms and maintain employer stock in the plan, even in the face of significant drops in value. In Dudenhoeffer, though, the Supreme Court found that the ERISA fiduciary “duty of prudence trumps the instructions of a plan document” — meaning fiduciaries are no longer entitled to the presumption of prudence.
At the same time, however, the Supreme Court created a new pleading standard for employer stock cases, stating: “Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim.”
To read the full Best Lawyers® article, click here.
Mary Jo Larson is a partner at Warner Norcross + Judd LLP, where she puts her 35 years of benefits experience to work on her clients’ 401(k)s, pension plans, nonqualified deferred compensation plans and executive compensation. She also advises fiduciaries responsible for the investment of plan assets. Larson is a fellow of the American College of Employee Benefits Counsel (ACEBC) and has been a member of the organization since 2005. Learn more about her practice here.
