United States: Fifth Third Bancorp V. Dudenhoeffer: Supreme Court Rejects "Presumption Of Prudence" For Stock Drop Cases

Last Updated: July 2 2014
Article by Sara Pikofsky, Daniel C. Hagen, Evan Miller and Travis DeHaven

On June 25, the United States Supreme Court issued its decision in Fifth Third Bancorp v. Dudenhoeffer, a decision that had been highly anticipated by the ERISA bar. The question before the Court was whether the so-called Moench presumption of prudence applied to a motion to dismiss. Rather than deciding whether the presumption was an evidentiary presumption to be applied at summary judgment or trial or a presumption to be applied at the motion to dismiss stage, the Court turned to the more fundamental question of the validity of the Moench presumption of prudence and rejected the presumption of prudence in its entirety. Although the Court rejected the presumption of prudence (on which many employers had relied in defeating breach of fiduciary duty claims in "stock drop" cases at the motion to dismiss stage), the Court also included a discussion of how to determine whether a complaint meets the Twombly "plausibility" standard. The Court's decision created a new battleground for litigants and new uncertainties for plan sponsors who provide the opportunity for employees and other plan participants to invest in employer stock through their 401(k) plans or employee stock ownership plans ("ESOPs").


Congress chose to encourage employee ownership of employer stock in the structure of ERISA. ERISA contains special provisions for individual account plans (including ESOPs and 401(k) plans) that invest in employer stock. Among other things, ERISA's general requirement that investments be diversified to avoid the risk of large loss does not apply to the acquisition or holding of employer stock by an eligible individual account plan such as a 401(k) plan or ESOP. In addition, employer stock is exempt from ERISA's prudence requirement but "only to the extent that it requires diversification."

Attempting to find an appropriate balance between the Congressional policy in favor of employee ownership and ERISA's duty of prudence, every court of appeals to consider the issue over nearly two decades held that a fiduciary is entitled to a presumption that holding employer stock is prudent. The presumption of prudence was first set forth by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). The Moench presumption provides that an investment in employer stock is entitled to a presumption that the investment is consistent with ERISA unless it is established that the fiduciary abused its discretion by investing in employer stock (or allowing participants the option of investing in employer stock).

The Moench presumption has served as a powerful defense in a multitude of so-called "stock drop" cases. Plaintiffs began filing stock drop cases in earnest after the Enron scandal, and dozens of companies that allowed investment in employer stock through their 401(k) plans were sued over the past decade. The suits generally alleged that the fiduciaries of the 401(k) plan violated ERISA's fiduciary obligations by allowing participants to continue investing in employer stock when they knew that doing so was imprudent. Defendants frequently responded to such suits with a motion to dismiss alleging that unless the company was on the brink of collapse, the Moench presumption permitted the fiduciary to continue to allow investment in employer stock. Although every court of appeals to consider the issue adopted the Moench presumption, there was less uniformity in describing the circumstances under which the presumption could be overcome (e.g., "brink of collapse," "dire circumstances," or something less drastic), and in considering the degree to which the question could be affected by plan drafting. The Sixth Circuit, which often appeared to be the shakiest of the adopters of the Moench presumption, broke from other courts of appeals that allowed application of the Moench presumption on a motion to dismiss, and it held in Dudenhoeffer that while the Moench presumption was valid, it was an evidentiary presumption that could apply only at summary judgment, not on a motion to dismiss.

Supreme Court Decision

Not only did the Supreme Court reject application of the Moench presumption on a motion to dismiss, it rejected it altogether. The Court, looking to the plain language of ERISA, held that ESOPs were not subject to any special standard of prudence, and that the statute says nothing about "brink of collapse" or similar concepts. Instead the Court held that "the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries...." The Court also held that the duty of prudence trumps the terms of plan documents, such as a requirement that a plan invest in employer stock.

The Court, however, did not stop with its holding that eviscerated the presumption of prudence. In an effort to provide a mechanism to weed out meritless claims, and to provide a proper balancing of employer and employee interests reflected in the structure of ERISA, the Court looked to the pleading standard espoused in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). As a preliminary point, the Court noted that evaluating a complaint for failure to act prudently would be context specific, as the duty of prudence is dependent on the circumstances prevailing at the time of the fiduciary act.

Despite this broad statement, the Court offered some guidance regarding what types of allegations a plaintiff would need to include in a complaint asserting a breach of fiduciary duty in order to survive a motion to dismiss. Perhaps the most clear pronouncement the Court made was that "where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances." In other words, a claim based only on publicly available information would be subject to dismissal. In addition, because the Court held that a fiduciary can reasonably conclude that it has little hope of outperforming the market based solely on the fiduciary's analysis of publicly available information, any claim that a fiduciary should have anticipated that the employer stock fund would underperform the market, or underperform other investment options or performance benchmarks, should also fail to state a plausible claim in the absence of special circumstances. The Court, however, did not provide any explanation or examples of what might constitute the "special circumstances" sufficient to get around this rule, other than to state that the special circumstances would have to render reliance on efficient markets unreasonable.

The Court also held that when stating a claim for breach of fiduciary duty based on nonpublic information, "a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it." The Court elaborated somewhat, offering three things that lower courts should consider in applying this standard. First, a fiduciary cannot be required to break the law, particularly the securities laws, in order to fulfill fiduciary duties. Second, the courts should consider the interplay between ERISA's fiduciary obligations and the complex securities laws and their objectives when assessing a complaint involving an ESOP or employer stock fund. Third, the complaint must plausibly allege that "a prudent fiduciary in the defendant's position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price." The Court, however, did not provide any further details on how to apply these three "considerations."

Significance of Opinion

The Court's opinion offers some certainty to plan sponsors with respect to potential litigation, while leaving many other questions unanswered. Clearly, the presumption of prudence is dead, but any claim that is based solely on public information is similarly buried. The Court has seemingly replaced the presumption of prudence with a new pleading standard that remains to be unpacked and explored, particularly with respect to claims based on fiduciary knowledge of nonpublic information. The three "considerations" the Court mandated are all subject to interpretation and will almost certainly be litigated extensively. What specifically a plaintiff must allege with respect to the prudence of offering employer stock as an investment option (or offering an ESOP) in order to survive a motion to dismiss remains to be hashed out.

In the Court's phrase, the new pleading standard should be used to "divide the plausible sheep from the meritless goats." While the Court (thankfully) identified several meritless claims, it never really stated what a meritorious claim against an employer stock fiduciary would look like. So at this point, we cannot determine what a "plausible sheep" looks like, or how many of them may be in the flock.

What to Do Now?

Even if the Fifth Third v. Dudenhoeffer decision eventually proves neutral or even positive for fiduciaries and plan sponsors—which may be the case—it undoubtedly increases the near-term risk of maintaining an ESOP or employer stock fund in a 401(k) plan. By changing the legal framework that had developed over more than 15 years, and by rejecting an approach that had been adopted by every court of appeals that had considered the issue, the Supreme Court created a level of uncertainty that is likely to generate a new wave of litigation.

Plan sponsors and fiduciaries should begin the process of reviewing plan design, plan documents, fiduciary procedures, and participant communications in light of the Supreme Court's holding and reasoning. Among other things:

  • Plan documents or fiduciary procedures that require an employer stock investment to be maintained unless the company is on the brink of collapse or facing some other dire circumstance will likely need to be revised. In the meantime, a fiduciary cannot rely on such plan terms if prudence would require otherwise.
  • Fiduciaries must implement procedures for carefully evaluating employer stock investments in the absence of a presumption of prudence. Procedures that focus solely or primarily on whether the company faces serious financial difficulties will no longer be sufficient.
  • As part of the context-specific inquiry demanded by the Court, a plan design that allows participants to freely choose whether or not to invest in employer stock may be more defensible as a prudent alternative despite the inevitable fluctuations in the stock's performance over time.
  • Participant communications will likely be even more important. An evaluation of a fiduciary's prudence in maintaining an employer stock investment may be influenced by whether the fiduciary has made significant efforts to educate plan participants about the risks of a single stock investment and the benefits of diversification.
  • Plans that have not engaged the services of an independent fiduciary should take this opportunity to consider the question again in light of the Supreme Court's new landscape. On the one hand, the Court's decision provides additional defenses to fiduciaries that may possess inside information. On the other hand, there are many questions about how lower courts will respond to the Court's direction to consider potential conflicts between ERISA and securities laws in the context of inside fiduciaries. For independent fiduciaries, the Court's endorsement of efficient market principles may provide an effective line of defense less cluttered by those issues.
  • Finally, some plan sponsors will want to consider whether to continue to maintain an ESOP or other employer stock investment option in the current environment. For example, some plan sponsors may want to consider whether the goal of encouraging employee ownership can be served through a Section 423 stock purchase plan or other alternative not subject to ERISA. Others may choose to make employer stock available in their 401(k) plan, if at all, only through individual choice in a brokerage window rather than through a company-designated investment alternative. 

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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.