ERIC Urges Supreme Court to Apply Presumption of Prudence in Plans with Company Stock

Washington, D.C. – The ERISA Industry Committee (ERIC) on February 3 filed (with other trade associations) with the U.S. Supreme Court an amicus brief in the Fifth Third Bancorp v. Dudenhoeffer case, urging the Court to apply the presumption of prudence at the pleading stage of a lawsuit.  

ERIC’s brief was prepared by Proskauer Rose LLP. 

In the Dudenhoeffer case, Fifth Third Bancorp sponsored a defined contribution plan that included company stock as an investment option. The participants alleged that the company faced increasing risks due to its participation in the subprime loan market and as a result, the fiduciaries should have removed the company stock as an investment choice. 

Many courts apply a presumption that fiduciaries act prudently when the plan requires them to invest in company stock. Inconsistent with other appellate courts that have ruled on this issue, the Sixth Circuit Court of Appeals held that this presumption of prudence is not available at the pleading stage. According to the ERIC brief, the Court also misconstrued the appropriate prudence test by failing to recognize the Congressional policy of encouraging stock funds through various statutory provisions giving them tax preferences and exempting them from a number of ERISA fiduciary rules that apply to non-stock funds. 

The U.S. Supreme Court agreed to decide whether the Sixth Circuit erred by holding that the participants were not required to allege in their complaint that the fiduciaries abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable. 

ERIC’s amicus brief to the Supreme Court argues that the presumption of prudence should apply at the pleading stage of a lawsuit. The brief explains that without a strong presumption of prudence, plan fiduciaries and corporate plan sponsors could be deterred from offering employer stock funds as an investment option for fear of the costs and risks of litigation. 

“Congress has repeatedly recognized the value of company stock and encouraged plan sponsors to include employer-stock funds in their plans. If the Supreme Court finds that the presumption of prudence does not apply at the pleading stage, companies may cease to offer company stock as an investment option. As a result, this is an important case for any company that has an employer-stock fund,” ERIC President Scott Macey said.  

The brief can be accessed by clicking on the link below. 

Amicus Brief in Fifth Third Bancorp v. Dudenhoeffer