ERISA-Supreme Court Rules That Presumption Of Prudence Does NOT Apply To ESOP Fiduciaries

In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (S. Ct. 2014), the U.S. Supreme Court (the “Court”) considered whether, when an ESOP fiduciary’s decision to buy or hold the employer’s stock is challenged in court, the fiduciary is entitled to a defense-friendly standard called a “presumption of prudence.” The Court noted that the Courts of Appeals that have considered the question have held that such a presumption does apply, with the presumption generally defined as a requirement that the plaintiff make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse.

The case involved a suit by former ESOP participants against the fiduciaries for investing in and holding employer stock, when the fiduciaries allegedly knew that the stock was overpriced and risky, and the stock subsequently declined in price by 74% when the stock market crashed. The Court held that no such presumption of prudence applies to ESOP fiduciaries. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets per ERISA ยง1104(a)(2).

The Court had a lot to say on how the prudence requirement is to apply to an ESOP fiduciary. More on that in a later blog.

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