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Courts Come to Mixed Conclusions on Presumption of Prudence Rule in Last Year

Corey Rosen

August 16, 2013

(Corey Rosen)Courts came to mixed conclusions on the presumption of prudence rule for ESOP fiduciaries, but generally upheld the standard. The presumption holds that fiduciaries of defined contribution plans are presumed to be prudent when investing in employer stock, particularly if the plan document requires that stock be an investment option. That conclusion comes from the National Center for Employee Ownership's annual update of employer stock litigation, ESOP and 401(k) Plan Employer Stock Litigation Review, 1990-2013. The publication covers over 300 cases for ESOPs and 401(k) plans on all the issues raised, including standing, the presumption of prudence, disclosure, who is a fiduciary, and other issues.

The 11th Circuit had the most nuanced decisions. In Smith v. Delta Airlines Inc., it reinstated an employee claim that the fiduciaries of Delta's 401(k)/ESOP imprudently breached their duties by allowing Delta stock to continue as an investment option in the face of sharply declining earnings at the start of the last decade. In 2006, a district court dismissed Smith's claim as a "failure to diversify" claim prohibited by ERISA 404(a)(2). In Fisch v. Suntrust Banks Inc., the court said the presumption did not hold if plaintiffs could show the investment met the criteria outlined in Lanfear V. Home Depot, namely that "a fiduciary could not reasonably have believed the plan sponsor would have intended the fiduciary, under the circumstances then existing, to continue investing in and holding the company's stock." But in White v. Marshall & Ilsley Corp., the court did uphold the presumption on the grounds that the stock could have gone up and fiduciaries would then have had to risk being sued for removing it prematurely.

The Second Circuit more unambiguously endorsed the presumption of prudence in Majad v. Nokia Inc., and Slaymon v. SLM Corp, although it narrowed it slightly in Taveras v. UBS AG, based on whether the plan documents required investment in company stock or not. The Ninth Circuit court ruled agreed with this approach in Harris v. Amgen. Finally, in Kopp v. Klein, the Fifth Circuit Court of Appeals joined the Second, Third, Seventh, and Eleventh Circuits in upholding the presumption.

The Sixth Circuit, however, has been more circumspect about the presumption of prudence as a cause for dismissal at the pleading stage, as it again showed in Griffin v. Flagstar Bancorp Inc.
The Supreme Court had three opportunities to review the presumption of prudence in Gray v. Citigroup Inc., Gearren v. McGraw-Hill Cos, and Fisher v. JP Morgan Chase & Co., but declined to do so.

The NCEO's ESOP and 401(k) Plan Employer Stock Litigation Review, 1990-2103, provides a comprehensive review and classification on employer stock litigation. It is available in print or by PDF for $75.
About the Author

Corey Rosen is the founder and senior staff member at the National Center for Employee Ownership.

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