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ESOP fiduciaries are subject to the same duty of prudence that applies to Employee Retirement Income Security Act of 1974, 29 U.S.C.S. § 1001 et seq., fiduciaries in general, except that they need not diversify the fund’s assets. 29 U.S.C.S. § 1104(a)(2).
Petitioner Fifth Third Bancorp maintained a defined-contribution retirement savings plan for its employees. Plan participants may direct their contributions into any of a number of investment options, including an “employee stock ownership plan” (ESOP), which invests its funds primarily in Fifth Third stock. Respondents, former Fifth Third employees and ESOP participants, filed the present lawsuit against petitioners, Fifth Third and several of its officers who were alleged to be fiduciaries of the ESOP. The complaint alleged that petitioners breached the fiduciary duty of prudence imposed by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §1104(a)(1)(B). Specifically, the complaint alleged that petitioners should have known--on the basis of both publicly available information and inside information available to petitioners because they were Fifth Third officers--that Fifth Third stock was overpriced and excessively risky. It further alleged that a prudent fiduciary in petitioners’ position would have responded to this information by selling off the ESOP’s holdings of Fifth Third stock, refraining from purchasing more Fifth Third stock, or disclosing the negative inside information so that the market could correct the stock's price downward. According to the complaint, petitioners did none of these things, and the price of Fifth Third stock ultimately fell, reducing respondents' retirement savings. The District Court dismissed the complaint for failure to state a claim, but the Sixth Circuit reversed. It concluded that ESOP fiduciaries were entitled to a “presumption of prudence” that does not apply to other ERISA fiduciaries but that the presumption is an evidentiary one and therefore does not apply at the pleading stage. The court went on to hold that the complaint stated a claim for breach of fiduciary duty. Certiorari was granted.
When an ESOP fiduciary’s decision to buy or hold the employer’s stock was challenged in court, was the fiduciary entitled to a defense-friendly standard that the lower courts called a presumption of prudence?
Under 29 U.S.C.S. § 1104(a)(1)(B), ESOP fiduciaries were subject to the same duty of prudence that applied to ERISA fiduciaries in general, except that they were not required to diversify the fund’s assets. The fiduciaries' arguments to the contrary were rejected as the statutory scheme did not evince an intent to relax the duty of prudence, and the potential for conflict with securities laws barring insider trading, while a legitimate concern, was not a basis for treating ESOP fiduciaries differently than non-ESOP fiduciaries. To address the need to weed out meritless claims, the Court identified several considerations that were to be considered in applying the pleading standard for Fed. R. Civ. P. 12(b)(6) motions. The judgment was vacated.