SCOTUS Addresses ERISA Fiduciary Duty and the Presumption of Prudence

SCOTUS Addresses ERISA Fiduciary Duty and the Presumption of Prudence

On April 2, 2014, the U.S. Supreme Court heard oral arguments in Fifth Third Bancorp. v. Dudenhoeffer, 2014 U.S. LEXIS 1938 (March 21, 2014).  The case involves the presumption of prudence afforded to Employee Stock Option Plan (“ESOP”) plan fiduciaries.  The presumption originated in Moench v. Robertson, 62 F.3d 553 (3d Cir 1995), a suit for breach of fiduciary duties by former ESOP plan participants against members of the plan committee.

ERISA and the Duties of the Fiduciary

ERISA’s basic fiduciary provisions impose a duty of loyalty on fiduciaries to act for the exclusive benefit of plan participants and beneficiaries. ERISA’s other fiduciary provisions include the prudence rule, the diversification rule, and the plan document rule.  See ERISA Sec. 404, 29 U.S.C. § 1104.  See also Lexis Tax Advisor – Federal Topical § 1C:20.09 for further discussion on each of these fiduciary duties.

The heart of the issue before the Supreme Court is the fiduciary’s duty of prudence.  In large part because of the Enron scandal, ESOP plan fiduciaries have come under close scrutiny and have been subject to suits alleging that they were aware that continued investment in employer stock was not a prudent investment.  See Alvin D. Lurie, Federal Income Taxation of Retirement Plans § 21.09 (Matthew Bender).

The Moench Presumption

In Moench, the ESOP plan committee continued to invest plan contributions in stock of the employer bank despite expressed concern by federal bank regulators on the financial condition of the bank and a major decline in stock price.  The corporate directors and plan committee members argued that the continued investment in solely employer stock was permitted because of the special nature of ESOP stock.  The court determined that in some limited circumstances, “ESOP fiduciaries can be liable under ERISA for continuing to invest in employer stock according to the plan's direction.” Moench, 62 F.3d at 556.  According to the Moench court though, the ESOP fiduciary who invests assets in employer stock is afforded a presumption that it acted consistently with ERISA.  This presumption of prudence may be overcome by showing that the continued investment in employer stock would “defeat or substantially impair the accomplishment of the plan’s purpose to provide workers retirement savings.”  Moench, 62 F.3d at 571.

Although the Moench presumption of prudence has been adopted by other circuit courts, the scope of the rule has not yet been well defined.  It is not clear how substantially the employer’s prospects must be affected for continued investment in employer stock to be considered imprudent.  

The Fifth Third Bancorp. v. Dudenhoeffer Case

In  Dudenhoeffer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012), Plaintiffs were ESOP plan participants who alleged breach of the plan fiduciary’s duty of prudence and loyalty in managing the ESOP.  The breach was based upon the defendant fiduciaries continuing to offer and failing to divest the plan of company stock, even though the fiduciaries had alleged “inside information” that the value of the employer’s stock would decline.  The Sixth Circuit court held that whether a fiduciary has met the ERISA duty of prudence turns on whether a “prudent fiduciary acting under similar circumstances would have made a different investment decision.”  Dudenhoeffer, 692 F.3d at 418-19.   A procedural issue was also at stake revolving around when a presumption of prudence would be appropriate.  The Sixth Circuit held that such presumption was appropriate only during the summary judgment and trial stage of the lawsuit, but not during the pleadings stage.

At this point it is hard to predict the outcome of the case.  Oral arguments focused on the presumption of prudence over the procedural issue regarding timing.  Some commentators are predicting a split decision.  An opinion by the Court is expected in June 2014. 


Peter J. Wiedenbeck, “Trust Variation and ERISA’s Presumption of Prudence,” Tax Analysts’ Tax Notes Today (March 18, 2014).  

Alvin D. Lurie, Federal Income Taxation of Retirement Plans § 7.09 (Matthew Bender 2014).

Alvin D. Lurie, Federal Income Taxation of Retirement Plans § 21.09 (Matthew Bender 2014).

Lexis Tax Advisor – Federal Topical § 1C:20.09