Supreme Court hearing holds implications for future of company DC plans

The U.S. Supreme Court decision to hear arguments over Fifth Third Bancorp v. Duddenhoeffer – a case that questions whether it’s prudent for companies to offer employee stock ownership within 401(k) investment schemes – will be front and center for retirement plan sponsors this spring.

In April, the Supreme Court will hear arguments over the case, which includes Cincinnati, Ohio-based Fifth Third Bancorp, a financial services company with over $130 billion in assets, and the implications of including its Fifth Third Stock Fund as an investment option in its company sponsored plan. Justices will likely determine whether this was prudent under the Employee Retirement Income Security Act.

The U.S. Officer of Solicitor General, along with the Department of Labor and Department of Justice, said in a November 2013 petition 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 office also asks 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 6^th Circuit previously decided against applying a presumption of prudence. 

Fifth Third sponsors an individual-account retirement plan, the Fifth Third Bancorp Master Profit Sharing Plan, which employees make voluntary contributions under a defined contribution framework from their earnings and Fifth Third matches the contribution up to 4% for each employee’s salary. The Fifth Third Stock Fund is listed as one of the 20 investment different investment options.

Under the class period, from July 19, 2007 to Sept. 21, 2009, two former participants in the plan alleged that the financial company breached ERISA’s “loyalty and prudence” guidance by continuing to invest in the Fifth Third Stock Fund or failing to divest the Fifth Third stock.

The prior complaint filed in the U.S. District Court for the Southern District of Ohio claimed that the Fifth Third’s stock was “excessively risky because of the company’s high-risk subprime mortgage lending practices, and that its price was artificially inflated because of the company’s inaccurate financial statements that failed to properly disclose those practices,” which led to a 74% decline in stock price.

The national government’s highest court decided Dec. 13, 2013 to hear arguments over whether offering an employee stock ownership plan violated prudent management of the employee’s assets. The Supreme Court will hear arguments April 2.