Tag Archives: Employee Retirement Income Security Act

Employer Stock in Qualified Plans: Recent Developments Largely Good News for Fiduciaries

Contributed by William Scogland, June 13, 2018

Many employer sponsored defined contribution (DC) plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”) maintain employer stock funds. Many such stock funds long antedate the Employee Retirement Income Security Act of 1974, as amended (ERISA).

In the wake of the Great Recession, plaintiffs’ counsel successfully prosecuted numerous ERISA fiduciary stock drop cases. The allegation was that fiduciaries breached their duties under ERISA by maintaining employer stock in a plan when they should have sold it.

16306823 - 3d illustration of scales of justice and gavel on orange background

scales of justice and gavel on orange background

Four years after a unanimous Supreme Court ruling (Fifth Third Bancorp. v. Dudenhoeffer) provided guidance on stock-drop lawsuit pleading standards, plaintiffs are having increasing difficulty in avoiding dismissal of such suits. Under Dudenhoeffer, plaintiffs cannot avoid a motion to dismiss by pleading merely that the stock went down and that the fiduciaries should have caused the plan to sell it before the decline. The plaintiffs must plead “special circumstances” to convince lower courts to let a lawsuit proceed. While the meaning of “special circumstances” is not totally clear, it appears that they must be extreme. In the Arch Coal case, the  court stated that “Plaintiffs’ allegations of Arch Coal’s ‘serious deteriorating condition’ and ‘overwhelming debt’ are evidence of the company’s slide into bankruptcy but do not establish a special circumstance under Dudenhoeffer.”

Plaintiffs must also convince the courts that an alternative action by a prudent fiduciary to keeping company stock in a DC plan wouldn’t do more harm than good.

For example, the “more harm than good” standard was cited by the district court in dismissing a suit against IBM. “The complaint is bereft of context-specific details to show how a prudent fiduciary would not have viewed the proposed alternatives as more likely to do more harm than good.” The standard has also been cited by, at least, one other district court.

Also, in the good news column is the Fifth Circuit’s decision in Tatum v. RJR, a reverse stock drop case. Here the plaintiffs alleged that the RJR fiduciaries breached their duties by eliminating the Nabisco stock fund when its stock price later increased. The Fourth Circuit held that those plan fiduciaries were not liable for any losses related to their procedural imprudence because a “hypothetical prudent fiduciary” would have made the same decision, even though they failed to engage in the process ERISA requires.

It is unlikely that ERISA fiduciary cases regarding stock funds have ended, and the ERISA fiduciary process is still important. Although the fiduciaries finally won, it was after an extended period of time and the expenditure of huge amounts of the employers’, fiduciaries’ and/or insurers’ money.

ERISA plaintiffs’ lawyers will probably keep filing such cases. In the past, ERISA plaintiffs’ counsel has succeeded in morphing their approaches, and they can be expected to do so in this context as well.

A Question From a Follower…

One of our blog followers recently submitted a question about whether there have been any recent attempts to repeal or dramatically amend the Pension Protection Act of 2006 (PPA), which instituted the most comprehensive reform of the U.S. pension laws since the Employee Retirement Income Security Act of 1974 (ERISA) was passed.  The PPA affected, and continues to affect, all varieties of retirement plans including defined benefit plans, defined contribution plans, and deferred compensation plans for executive and other highly compensated employees.

There have been no “breaking-news” attempts to repeal or gut the PPA like the ones we are hearing about with respect to the Patient Protection and Affordable Care Act, in fact, there is little news at all regarding the PPA.  That being said, 2012 does mark the end of the phase-in period for the new interest rates to be used when a defined benefit plan participant elects, pursuant to the terms of the plan, for a lump sum payout when the participant quits or retires.

Beginning in 2008, the PPA modified the mortality tables and interest rates that defined benefit plans must use when calculating the minimum value of lump-sum payouts.  The new mortality table, which reflects recent increases in life expectancy, went into affect in 2008.  The estimates are that the change in the mortality table has or will result in increases in the value of lump-sum payouts by 1% to 2%.  Prior to the PPA, defined benefit plans used the prescribed current interest rate on 30-year U.S. Treasury bonds to calculate the current lump-sum value.  The PPA requires that plans now use the corporate bond interest rate to calculate such a value.  The impact of interest rates on lump-sum payouts is inverse—the higher the interest rate, the smaller the lump-sum.  The T-bond interest rate has been historically lower than interest rates on corporate bonds, so, in theory, this change will ultimately result in lower lump-sum payouts. 

While blogging on “the actual impact of the phased-in change in interest rates to be used when calculating the minimum value of a lump-sum payout” six months from now sounds intriguing, I think I’d rather answer another blog follower’s question.  Followers – thanks for following and thanks for submitting specific questions – keep ‘em coming.