Companies are paying close attention to Fifth Third decision, Towers Watson survey finds

In a survey of 160 employers with company stock in their defined contribution plans, Towers Watson found that companies are paying close attention to the Supreme Court’s Fifth Third decision. They are reviewing, or planning to review, procedures for monitoring company stock, investment policy statements, and plan documents.

In Fifth Third Bancorp v. Dudenhoeffer, the U.S. Supreme Court decided that ESOP fiduciaries were not entitled to any special presumption of prudence. Thus, the fiduciary decisions regarding the maintenance of company stock as a plan investment are subject to the same general fiduciary duties under ERISA as other plan investments. As Towers Watson points out, new “stock drop” lawsuits are still being filed and several courts have to refused to dismiss these complaints.

The Towers Watson survey found that the majority of responding companies have reviewed or are planning to review their procedures for monitoring company stock, investment policy statements, and plan documents. Specifically, 76% of employers have reviewed, or plan to review, their procedures for monitoring company stock. Of the companies that have completed their review, 37% have changed, or plan to change, their procedures. Seventy-four percent of employers have reviewed or plan to review their investment policy statements, and, of those that have completed their review, 41% have revised or plan to revise their statements. Sixty-two percent of responding companies have reviewed or plan to review their plan documents. Of those that have completed their review, 27% have amended or intend to amend their plans.

Impact on plan sponsors

According to Towers Watson, the Supreme Court’s ruling in Fifth Third is “consistent with ERISA’s general approach to evaluating fiduciary decisions based on whether a fiduciary has followed a `prudent process.’” A prudent process, Towers Watson says, “will usually include documenting that a plan’s fiduciaries have sought appropriate information, asked pertinent questions and accessed experts when appropriate.” Thus, Towers Watson believes that fiduciary committees will benefit from a post Fifth Third review of their decision to offer company stock as a 401(k) plan investment option.

Towers Watson recommends that following questions as a starting point for plan sponsors:

• Should the company maintain company stock as an investment option and, if so, what, if any modifications should be made to the company’s risk-management approaches

• If the company should not continue to keep company stock as an investment option, how should the company manage its elimination?

According to the Towers Watson survey, 38% of employers have either already retained or are considering retaining a third party as an independent fiduciary with the specific responsibility to monitor company stock as an investment choice in their plans. Finally, 26% have started or are considering initiating procedures to eliminate company stock as a plan investment choice.

Source: Towers Watson press release, May 2015.

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