The DOL has filed a brief with the U.S. Supreme Court in the Dudenhoeffer v. Fifth Third Bank employee stock ownership plan (“ESOP”) dispute that made me think about Boundaries, a book about the importance of establishing boundaries, and compelling respect for those boundaries. In designing ERISA, Congress forged a delicate balance between protecting benefit plans and encouraging employers to provide those benefit plans. The U.S. Supreme Court reminded us in CIGNA v. Amara that this delicate balance includes carefully distinguishing the roles of plan sponsors and fiduciaries, even when one entity (e.g., the employer) wears both hats. The Court ruled that CIGNA, while acting as plan fiduciary, did not have authority to change the terms of the plan as written by CIGNA, acting as plan sponsor.
ERISA sets forth provisions that allow an employer to establish a qualified plan that is an ESOP, with favorable benefits. The plan sponsor can write a plan so that the entire plan is in an ESOP, or so that one portion of the plan is the ESOP. An ESOP is a plan design component: it must be written to invest primarily in employer securities, and is exempted from certain other requirements, most notably the diversification requirement. An ESOP can even be written so that the ESOP owns all of the stock of an S Corporation, effectively paying no corporate income tax. The plan document requirements are so extensive that ESOP sponsors had to wait about four years to receive their most recent favorable determination letters from the IRS. Thus, many believe that selling off employer stock (terminating the ESOP) would require a plan sponsor amendment. The concept that the ESOP exists and invests in employer securities as a matter of plan design rather than fiduciary discretion is referred to as “hardwiring.”
But some participants have argued that an ESOP invests in employer stock via fiduciary discretion, and that the fiduciary must continuously consider whether the employer stock remains a prudent investment. These arguments have arisen in “stock drop” cases, where an employer’s stock price has fallen. Courts have addressed this plan sponsor / fiduciary boundary dispute by applying a presumption of prudence of investment (e.g., Moench presumption), absent certain circumstances such as dire financial straits. The details and application of the presumption vary by circuit. Most ERISA stock drop cases have been dismissed an early stage, based on the presumption of prudence. In Dudenhoeffer v. Fifth Third Bank, however, the Sixth Circuit Court of Appeals caused a circuit split by ruling that this presumption does not apply at the initial stage of a case. At the invitation of the U.S. Supreme Court, the DOL filed a brief as amicus curiae. The DOL argues not only that the Supreme Court needs to hear this case, but that it should reframe the questions, rule that an ESOP is an investment that is subject to divestment and prudence review in the same manner as other investments, rule that the presumption does not exist at the initial state, and rule that the presumption of prudence does not exist, at all.