In Saumer v. Cliffs Natural Resources Inc., No. 16-3449 (6th Cir. 2017), the Sixth Circuit Court of Appeals (the “Court”) began by noting that ERISA requires plan fiduciaries to, among other things, manage plan assets prudently and diversify investments so as to minimize the risk of large losses. For the past forty years, however, ERISA has also encouraged employee ownership of employer stock. To promote this goal, ERISA permits companies to offer an Employee Stock Ownership Plan (an “ESOP”)—a retirement option designed to invest primarily in employer stock. Because ESOPs are, by definition, not prudently diversified, Congress fashioned an exemption to these core fiduciary duties: the diversification requirement and the prudence requirement (only to the extent that it requires diversification) of ERISA are not violated by acquisition or holding of employer stock. In this case, the Court is being asked to reconcile ERISA’s requirement that a fiduciary act prudently with Congress’s blessing of undiversified ESOPs.
In this case, Cliffs Natural Resources (“Cliffs”) is a publicly traded iron-ore and coal-mining company. Its business depends on the price of iron ore, which in turn depends on Chinese economic growth. In 2011, Chinese construction projects drove iron-ore prices to all-time highs. Betting on continued high prices,Cliffs financed the purchase of a mine located in Northern Quebec (“Bloom Lake Mine”). Projecting that the mine would increase cash-flow, Cliffs upped its stock dividend to double the S&P 500 average. Unfortunately, in 2012, a global demand slump halved the price of iron ore, cutting deeply into Cliffs’s revenue. The Bloom Lake Mine quickly turned from the company’s lifeblood to, in the words of Cliffs’s CEO, “the cancer that we have to take out.” The mine’s costs exceeded predictions, often by significant margins. And the company’s decreased revenue and high costs exacerbated its financial weakness. The market responded: in 2013, Cliffs stock performed worse than any other company in the S&P 500. All told, Cliffs lost 95% of its value between 2011 and 2015 (compared to a roughly 50% gain for the broader market during the same period).
Plaintiffs are Cliffs employees who participated in the company’s defined-contribution plan, commonly known as a 401(k). The plan allowed participants to invest in twenty-eight mutual funds, including an array of target-date, stock, and bond funds. The plan also offered an ESOP that invested solely in Cliff’s stock. Employees enjoyed discretion about whether to invest their income and matching contributions in the ESOP. If the employee failed to choose an investment option, the fiduciary directed contributions into a money-market fund. After Cliffs stock cratered, plaintiffs filed a class action claiming that the plan’s fiduciaries—investment-committee members and corporate officers—imprudently retained Cliffs stock as an investment option. In particular, plaintiffs allege that it was imprudent to continue investing in Cliffs because: (1) the company’s risk profile and business prospects dramatically changed from when the investment was introduced due to the collapse of iron ore and coal prices and Cliffs’s deteriorating financial condition, and (2) the fiduciaries possessed inside information showing that the stock was overvalued.