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Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications

Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan.  The trial court dismissed the suit for failure to state a plausible claim for relief.  The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA.  First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.”  The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not relieved of ERISA’s other requirements, such as acting prudently and solely in the participants’ interest.  Thus, a fully developed record could show that the defendants failed to act prudently by remaining invested in employer stock after the stock’s value dropped by 74 percent, even though they had no obligation under the plan to do so.  Second, the court held that the defendants may also have breached their fiduciary duty by making material misrepresentations in fiduciary communications.  The defendants argued that any misrepresentations made in SEC filings were not fiduciary communications under ERISA.  The court disagreed, reasoning that while ERISA requires plans to publish an SPD, ERISA does not require an SPD to incorporate by reference SEC filings.  By incorporating the SEC filings in the SPD, any statements made in the filings became fiduciary communications under ERISA.  Thus, the defendants could be liable for fiduciary breach for any material misrepresentations made in the SEC filings. Dudenhoefer v. Fifth Third Bancorp, No. 11-3012 (6th Cir. Sept. 5, 2012).

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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November 2012
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