Stock Drop Cases Increasing Again, But Most Aren't Making Progress

In the wake of the market collapse, a number of lawsuits are being filed by participants arguing that fiduciaries of their 401(k) plans or, less often, ESOPs should have removed company stock as an investment option and/or notified employees of impending financial problems. A number of recent court rulings, however, have given fiduciaries considerable leeway under the Moench doctrine, which states that unless the company is in imminent danger of collapse, the fiduciaries should not be held responsible provided the plan documents state that employer stock is one of the investment options or, as in an ESOP, is the sole option. Courts have come to more mixed conclusions on the issue of whether financial information should be disclosed to participants before it is disclosed to the market (this would apply only where employees are making an investment choice involving employer stock).

The new cases are likely to be even harder for plaintiffs to win because judges may be more sympathetic to the notion that few people anticipated what happened in the markets. So unless there was fraud (as at Enron and others) or an intentional effort to induce employees to buy stock when company fortunes were doubtful, plaintiffs would have to convince courts that fiduciaries should be smarter than the markets, even on a daily basis.

Over the now eight-year history of these cases, very few have actually had final rulings, but a number have been settled, mostly for amounts that were under $1,000 per participant.