Sixth Circuit declines to apply presumption of prudence at pleadings stage


In the latest in a series of 2012 rulings, the U.S. Court of Appeals in Cincinnati (CA-6) has again held that the presumption of prudence generally applicable to investments in employer stock could not be applied at the pleadings stage to dismiss a claim for fiduciary breach. Accordingly, profit-sharing plan participants who alleged that severe losses in the value of employer stock held in the plan resulted from breach of fiduciary duty by the employer CEO and the plan could continue to litigate their claim.

CCH Note: The Sixth Circuit issued similar rulings regarding the so-called Kuper/Moench presumption in Pfeil v. State Bank and Trust Co. and Griffin v. Flagstar Bancorp, Inc. Under the presumption of prudence, a fiduciary of an eligible individual account plan (i.e., profit-sharing, stock bonus, thrift or savings plan that invests primarily in qualifying employer securities) who invests plan assets in employer stock is entitled to a presumption that it acted consistently with ERISA. The presumption, which is viewed as necessary to protect fiduciaries who are required or encouraged by plan terms to invest plan assets primarily in the stock of the sponsoring employer, was adopted by the Sixth Circuit in Kuper (and by the Third Circuit in Moench). However, there is a dispute among the Circuits as to whether the presumption is an evidentiary presumption or a standard of review that may be applied at the pleadings stage.

Bank’s stock fund plummets

A bank maintained a defined contribution plan for its employees. Participants could choose to direct the plan to purchase investments for their individual account from nearly 20 options, including an employer stock fund. In addition, a 4% employer match was initially invested in the stock fund (though it could be moved subsequently to other investment options).

During the class period, from July 2007 to September 2009, the price of the employer’s stock declined 74%, causing the plan to lose tens of millions of dollars. The plan continued to maintain the stock fund as an investment option during that period.

Fiduciary breach

Plan participants filed a class action lawsuit, claiming that the plan and the employer CEO breached their ERISA fiduciary duties by continuing to offer the stock fund as an investment alternative. Participants also claimed the defendants breached their fiduciary duty by failing to provide participants with accurate information about the risks of investment in the employer’s stock.

The district court dismissed the participants’ suit for failure to state a claim, concluding the defendants were protected by the Kuper/Moench presumption.

Presumption inapplicable

Citing its earlier ruling in Pfeil, the appellate court reaffirmed its position that the Kuper presumption is not an additional pleading requirement and does not apply at the motion to dismiss stage. At the pleadings stage, the participants need only allege a fiduciary breach and a causal connection to losses suffered by the plan. The participants’ allegation regarding the defendants’ failure to remove the stock fund as an investment option despite their awareness of the fund’s investments in the subprime mortgage market met this burden.

Inaccurate information

Regarding the participants’ disclosure claim, the district court dismissed it because the alleged misstatements were made in SEC filings and thus were not made in a fiduciary capacity. The participants countered that the fiduciary act occurred when the defendants chose to incorporate by reference the SEC filings into the plan’s SPD. The appellate court agreed with the participants, holding that the express incorporation of SEC filings into an ERISA-mandated SPD is a fiduciary communication. Thus the participants met their burden at the pleadings stage by plausibly alleging that the defendants intentionally incorporated the SEC filings into the SPD and thereby conveyed misleading information.

Source: Dudenhoefer v. Fifth Third Bancorp (CA-6).

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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