United States: Supreme Court To Address Presumption Of Prudence For ERISA "Stock Drop" Cases

The Supreme Court agreed on December 13, 2013 to review an issue critical to ERISA "stock drop" cases and important more generally for ERISA individual-account plans that invest in employer stock.

An exception to ERISA's investment diversification rules permits ESOPs, 401(k) plans and similar plans to buy and hold employer stock without diversifying. The statute does not expressly relieve plan fiduciaries of any non-diversification-related duty to invest prudently. Lacking Supreme Court guidance, many lower courts have tried to define this limited or residual duty of prudence by holding that relevant fiduciaries investing in employer stock are entitled to a presumption of prudence but not to absolute exemption.

In its grant of certiorari in Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court agreed to review whether the presumption of prudence applies at the pleadings stage of a case alleging fiduciary breach or only later and as part of evidentiary proceedings, as the Sixth Circuit held. The U.S. Solicitor General has urged the Court to consider the broader question of whether any presumption of prudence applies to eligible individual account plan investments in employer stock.


The U.S. Court of Appeals for the Third Circuit articulated the presumption of prudence in Moench v. Robertson1 to address ERISA's competing statutory purposes of encouraging plan-based employee ownership of employer stock and the requirement that fiduciaries of ERISA plans prudently invest plan assets. In Moench, plaintiffs argued that ERISA's employer-stock exception to the diversification rules should be applied narrowly and that a court reviewing a related claim of fiduciary breach should not defer to the fiduciaries' decision to invest plan assets in the stock. Defendants, on the other hand, urged the court to adopt the "arbitrary and capricious" standard that the Supreme Court had previously applied to discretionary determinations of benefit claims under ERISA plans. The court rejected plaintiffs' argument on the ground that, among other things, "strict judicial scrutiny" would "essentially render meaningless" the exception to the diversification requirement. It held that a fiduciary investing the assets of an eligible defined contribution plan requiring investment primarily in employer stock should be presumed to have acted prudently but that plaintiffs could rebut the presumption by establishing that the fiduciary had abused its discretion.2

Subsequent Developments

The bursting of the "dot-com bubble" in the early 2000s and the financial crisis of the late 2000s each led to a surge of stock drop cases, resulting in multi-million dollar settlements. Over time, however, defendants have successfully persuaded the U.S. Courts of Appeals for the Second, Fifth, Sixth, Seventh, Ninth and Eleventh Circuits to adopt the presumption of prudence, with most of those Circuit Courts having done so within the last several years.

While the Moench case involved an ESOP, most courts addressing the issue, including the Third Circuit, have held that the presumption of prudence can also apply to ERISA-governed non-ESOP eligible individual account plans that invest most of their assets in securities other than employer securities (such as a 401(k) plan with an employer stock fund).

The Supreme Court's Decision to Grant Certiorari in Fifth Third Bancorp

The claims of breach of the ERISA duty of prudence in Fifth Third Bancorp stem from the fact that plan fiduciaries maintained the plan's investment in employer stock even though the company's stock value was suffering a 74% decline resulting from the company's exposure to subprime mortgages.

While the facts of the case are similar to many other ERISA stock drop cases, the Sixth Circuit broke with other Circuit Courts in two important (and plaintiff-friendly) respects. First, rather than requiring plaintiffs to overcome the presumption of prudence by alleging that fiduciaries knew or should have known that the company faced a dire financial situation, the Sixth Circuit required only an allegation that a prudent fiduciary acting under similar circumstances would have made a different investment decision. Second, the Sixth Circuit held that the presumption of prudence was an evidentiary standard, meaning that it would not apply at the motion-to-dismiss stage – a distinction that could be very costly to defendants.

It is the latter point that the defendants in Fifth Third Bancorp asked the Supreme Court to review; but, as the Solicitor General noted, that question is "closely bound up" with the question of whether the presumption should apply at all. If the Court does review the broader question, its holding is likely to have important implications for all ERISA-governed individual account plans investing in employer stock. Even if the Court were to decide only the more limited question of when the presumption applies, its ruling has the potential to affect stock drop claims litigation significantly.


1. 62 F.3d 553 (3d Cir. 1995).

2. In Moench, the court held that the plaintiffs' allegations of a "precipitous decline" in the price of the employer's stock, coupled with allegations of fiduciaries' "knowledge of [the employer's] impending collapse" and the fiduciaries' own "conflicted status," sufficed to overcome the presumption of prudence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions