As I mentioned in my Heimeshoff v. Hartford blog, the U.S. Supreme Court has agreed to review Dudenhoeffer v. Fifth Third Bancorp, now captioned Fifth Third Bancorp v. Dudenhoeffer. The Court granted certiorari on the question as originally framed:
Whether the Sixth Circuit erred by holding that Respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan (“ESOP”) abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by [ERISA], and every other circuit to address the issue.
Thus, the Court rejected the DOL’s request to reframe the question, 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. (The Court did not take the second question, regarding the summary plan description.)
In Heimeshoff, a unanimous decision, the Court reiterated that the plan (document) “is the center of ERISA.” This has been a very consistent theme in a series of Court decisions. The Court has repeatedly rejected arguments that the plan terms should be disregarded. In Heimeshoff, the Court reiterated, “This focus on the written terms of the plan is the linchpin of a ‘system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place,’” citing Varity Corp. v. Howe, emphasis added. In other words, the DOL as amicus curiae got it backwards with their argument that ERISA, not the plan, controls, and that the plan terms violated ERISA’s structure. It is always dangerous to hazard a guess as to how a court will rule. But when you consider that in Heimeshoff, the Court resolved a circuit split by reminding us that the plan is the center of ERISA, and that the Court took this split with “every other circuit” just before announcing Heimeshoff, I think we have a pretty good idea where the Court is going with this. Which means ESOPs may live to see another day.
As we are reminded by the blog The D&O Diary, the professional insurance liability world is watching this case. Insurance is available to help protect the persons who may be exposed to liability for fiduciary breach claims, and we hope those of you are exposed have this coverage. But the cost of this coverage could be substantially impacted by the outcome of Fifth Third. In the interim, a little “derisking” is worth considering, at least in the context of a combined 401(k)/ESOP. Recently, we saw a bank that historically deposited matching contributions into the ESOP change its policy, to invest in accordance with the participants’ elections for future 401(k) plan contributions. The bank cited diversification principles as its reason for making this change, and reminded participants to consider diversification as part of their investment strategy. So if you are an ESOP fiduciary, stay tuned for word from the U.S. Supreme Court.