Retirement plan sponsors and their consultants are attentively following the Supreme Court today as it hears oral arguments in Fifth Third Bancorp v. Duddenhoeffer, a case that has implications for the retirement plan industry’s fiduciary standard in employee stock ownership plans. 

The Supreme Court is scheduled to start its adjudication of the case – involving Cincinnati, Ohio-based Fifth Third Bancorp, a financial services company with over $130 billion in assets – on April 2. The case addresses whether the company was was prudent – under the Employee Retirement Income Security Act – to include its Fifth Third Stock Fund as an investment option in the company-sponsored retirement plan.

According to legal experts, the fiduciary standard of including employee stock option in 401(k) plans could have grave implications for plan sponsors.

“There is a general applicative provision of ERISA that any fiduciary has to administer the plan in compliance with the plan documents,” says Jamie Fleckner, a partner in Goodwin Procter's litigation department and head of the firm's ERISA litigation practice. “Depending on what the Supreme Court says, it could offer more general guidance for plan sponsors and other fiduciaries as to whether, and under what circumstances, they should deviate from a plan document.”

While noting past Supreme Court cases such as CIGNA Corp. v. Amara , ruled in May 2011, and the U.S. Third Circuit’s Moench v. Robertson case from 1995, Matthew Whitehorn, a partner and chair of Dilworth Paxson’s employee benefits group, notes that this case brings about a “very tricky issue.”

“The problem that it gives rise to is that employers, under ERISA, sometimes end up … wearing two hats,” Whitehorn explains. “The Internal Revenue Code reads [that] an [employee stock ownership plan] ESOP is designed to invest primarily in employer securities [and]  that’s what is reflected in your plan document. But at the same time, [if] the company has some type of problem and the stock may not be a prudent investment from a fiduciary perspective, it creates a real conflict.”

In November, the U.S. Officer of Solicitor General, along with the Department of Labor and Department of Justice, said that it hopes to question whether the “fiduciary of an employee stock ownership plan violated the duty of prudence by continuing to invest plan assets in the employer’s stock” when the employer “…faced imminent financial peril.” The Solicitor General’s office also asked the Supreme Court to consider whether plan fiduciaries can be liable under ERISA for misstatements in Securities and Exchange Commission filings.

“Although respondents alleged that Fifth Third had ‘embarked on an improvident and even perhaps disastrous foray into subprime lending’ that ‘caused a substantial decline in the price of its common stock,’ the district court concluded that those allegations did not rebut the presumption,’” federal officials cite in the filing.

The United States Court of Appeals for the 6th Circuit previously decided against applying a presumption of prudence.

For those in the retirement plan advisory space, such as Robert C. Lawton, founder and president of Milwaukee, Wisc.-based Lawton Retirement Plan Consultants, LLC, the outcome of the case could send the message that employer stock options are not necessarily good investment options for retirement plans.

“The major reason, and it is hard to disagree with this, is that when the company is struggling and the stock price is under pressure, senior management is generally not going to give 401(k) participants accurate guidance on what they should do with their company stock holdings in the 401(k) plan,” Lawton explains.

He also says that the Court’s ruling “may result in conditions that make it difficult administratively or impossible [due to cost] to continue offering company stock in 401(k) plans.”

What the future holds for the high court’s ruling is unknown. However, Fleckner agrees that the decision will likely address the presumption of prudence.

“You never know how they [Supreme Court Justices] are going to decide a case, and what they say in their decision could affect other aspects in the administration of 401(k) plans,” Fleckner says.

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