I would like to think that I am reasonably smart and that I have learned something after 35 years in financial services. And yet, all it takes is an article by Attys. Bokert and Hahn on the pros and cons of offering company stock in a 401k to make me realize I have more to learn. Their 9-page article presented the legal landscape pre and post-Dudenhoeffer and was worthy of two large cups of strong coffee. Here is my attempt at a summary.
Before 2014, courts often applied a "presumption of prudence" standard when evaluating fiduciary decisions to offer employer stock in retirement plans. However, inFifth Third Bancorp v. Dudenhoeffer(2014), the U.S. Supreme Court eliminated this presumption, making it more challenging for plaintiffs to bring successful lawsuits against plan fiduciaries when employer stock prices drop.
Pre- and Post-Dudenhoeffer Legal Landscape
- ERISA allows retirement plans to offer employer stock despite its general diversification requirement. However, fiduciaries must still act with prudence, skill, and diligence.
- BeforeDudenhoeffer, courts presumed fiduciaries acted prudently when offering employer stock (Moenchpresumption), shifting the burden to plaintiffs to prove otherwise.
- Dudenhoefferremoved this presumption and established new pleading standards. Plaintiffs must now prove that fiduciaries ignored "special circumstances" affecting stock prices or failed to act on insider information in a way that would not violate securities laws.
Challenges for Plaintiffs Post-Dudenhoeffer
- Courts generally assume that stock market prices accurately reflect public information, making it difficult to argue fiduciaries should have acted differently.
- If plaintiffs argue fiduciaries had insider information, they must propose an alternative course of action that would have helped the plan without violating securities laws or doing more harm than good.
- Most post-Dudenhoefferlawsuits have been dismissed due to these stringent standards.
Considerations for Plan Fiduciaries
- Monitoring Employer Stock:Fiduciaries should monitor stock performance and watch for "special circumstances" affecting price reliability.
- Independent Fiduciaries:Engaging an outside investment manager can reduce litigation risks and potential conflicts of interest.
- Procedural Prudence:Fiduciaries should maintain thorough documentation demonstrating prudent decision-making.
- Participant Education:Educating employees on the risks of employer stock investments can help mitigate legal risks.
The Parting Glass
The authors do an excellent job of presenting the pros and cons of offering company stock in a 401k from a legal perspective. I offer two views from the employee's side of the table.
In my first 401k, I invested in company stock from a sense of company pride (as well as relief that I had a job in a challenging economy). One could argue that this was not the best rationale or reason for making that decision. I was not aware of financial risk and performance.
Further into my career, I met a retired employee who had all of her 401k in company stock. She made the initial investment based on the idea that she would have a sense how the company was doing as she worked there. The water cooler gossip, she felt, would keep her informed. Once she retired though, she had no insight into how her former employer was doing and that introduced an element of financial risk into her "all company stock" portfolio.
WhileDudenhoefferhas made stock-drop lawsuits more difficult, fiduciaries must still exercise caution and follow best practices to minimize liability. This is a sensible and prudent approach.