Employer stock plans see growth despite SCOTUS ruling

Despite this past summer’s Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer, which found that fiduciaries of employee stock ownership plans are subject to the same duty of prudence that applies to ERISA fiduciaries in general, companies with ESOPs and stock purchase plans are seeing an increase in plan assets and are using the plans as a retention tool.

In June, the nation’s highest court ruled in a unanimous decision that “ESOP fiduciaries are not entitled to any special presumption of prudence. Rather they are subject to the same duty of prudence that applies to ERISA fiduciaries in general,” wrote Justice Stephen Breyer.  

The Supreme Court decision will largely have an effect on publicly traded companies. It’s still uncertain how it will affect the nearly 98% of ESOP companies that are private, says Michael Keeling, president of the ESOP Association. So far the industry is not seeing any severe deterrents to ESOP growth due to Dudenhoeffer, he says.

See also: ESOP fiduciaries not entitled to presumption of prudence

“The ESOP marketplace is dominated overwhelmingly, just like the American economy, by private companies is not impacted by the Dudenhoeffer case in any significant or clear cut way,” Keeling says, while noting that it’s also possible to see “sincere knee-jerk reactions” to such court cases.  

Kevin Barry, executive vice president of Fidelity Investment’s stock plan services business, admits that the financial services company is aware of the ESOP decision, but notes it hasn’t affected their business because they serve employee stock purchase plans. Rather than a company contributing its stock to a retirement-type plan for employees, like an ESOP, employee stock purchase plans give employees a piece of the company’s pie and success in the form of company stock at a discount from the market price.

The Employee Ownership Association, a nonprofit affiliated with the ESOP Association, finds that 65% of member companies reported better performance in 2013 than 2012 – this includes 70% who said their revenues increased and 64% who said their profitability improved.

Employee “loyalty is not only to the style or the culture of the company,” Keeling explains, adding that employees with access to ESOPs may stay longer with a company, lowering turnover.

See also: Fourth Circuit decision spells more uncertainty for retirement plan fiduciaries

Companies such as Fidelity, that assist in the administration of employee stock purchase plans, are also thriving. In the first half of 2014, Fidelity says it secured about 26 new clients, with the majority including public companies in the pharmaceutical and high technology industries. Collectively, Fidelity’s stock plan services platform now assists more than 280 employers that represent about $112 billion in plan value.

“Companies have a lot benefits costs to manage with health care and retirement and they’re trying to get the most bang for their buck out of everything that they spend on their employees,” explains Barry. “I think they are seeing this [company stock plans] as an opportunity to demonstrate value for their employees.”

Forty percent of respondents in a Fidelity survey say company stock plans are a “must have” when considering a move to a new employer. And 37% indicate that company stock plans make it more difficult for them to leave their current job.