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Fifth Circuit Holds that Offering Single Stock Investments in a 401(k) Plan is Not Per-Se Imprudent

Following a spinoff, a 401(k) plan continued to offer the employer stock fund of the predecessor parent company as an investment alternative, but closed it to new investments. After the share price fell by approximately 50%, the participants brought a lawsuit against the plan fiduciaries claiming, among other things, that the fiduciary breached its duty to diversify under ERISA Section 404(a)(1)(C) by retaining the stock fund as an investment alternative. The District Court dismissed the case and the U.S. Court of Appeals for the Fifth Circuit upheld the dismissal. The Fifth Circuit held that although the stock of the former parent was not statutorily exempt from ERISA’s diversification because it was no longer a “qualifying employer security”, there was no obligation for the plan fiduciaries to force plan participants to divest from the funds. The court explained that ERISA contains no per se prohibition on individual account plans offering single-stock… Continue Reading

COVID-19 EMPLOYEE BENEFIT AND EXECUTIVE COMPENSATION QUESTIONS AND ANSWERS

In light of the recent economic developments stemming from the COVID-19 pandemic, many employers are evaluating their employee benefit plans and how employee and employer costs will be impacted. The following summary provides a list of questions we have been receiving from clients over the past week, along with action items to help employers address these issues. Health and Welfare Plans and Fringe Benefits Should benefits coverage continue while an employee is on an unpaid furlough? If so, how would the employee pay the employee’s portion of the premium? Could the employee elect to drop coverage due to the reduction in hours of active service? Could the employer pay for coverage for some or all of its furloughed employees? Continued eligibility for benefits will depend on whether the employer treats the furlough as a termination of employment or as an unpaid leave of absence. The terms of the plan, including… Continue Reading

Supreme Court Vacates and Remands IBM Stock Drop Case

In a per curiam opinion, the U.S. Supreme Court vacated the decision of the U.S. Circuit Court of Appeals for the Second Circuit in favor of a group of IBM retirement plan participants who alleged that IBM, in its capacity as plan sponsor of the IBM Company Stock Fund (which is an ESOP governed by ERISA), breached its duty to prudently manage the ESOP’s assets. The participants alleged that IBM had a duty to disclose enormous losses being incurred by its microelectronics business and that the company’s failure to disclose such losses resulted in an artificially high stock price, which dropped significantly once those losses were eventually disclosed (see our prior blog post on the Second Circuit’s opinion here). In its opinion, the Supreme Court remanded the case back to the Second Circuit so that court could consider new arguments briefed by IBM in its appeal to the Supreme Court… Continue Reading

Second Circuit Allows “Stock-Drop” Case Against IBM to Proceed

In the recent case of Jander v. Retirement Plans Committee of IBM, the U.S. Circuit Court of Appeals for the Second Circuit ruled in favor of a group of IBM retirement plan participants who alleged that plan fiduciaries had breached their duty to prudently manage the assets of the IBM Company Stock Fund, an ESOP governed by ERISA. The case was filed after IBM’s stock price declined by more than $12 per share in 2014, following an announcement that IBM would pay $1.5 billion to offload its struggling microelectronics business. Plaintiffs alleged that IBM failed to publicly disclose enormous losses being incurred by the microelectronics business and had continued to report an inflated value for the business (which, in turn, resulted in an artificially high IBM stock price). The district court dismissed the suit, ruling that the plaintiffs had failed to state a duty-of-prudence claim under ERISA because a prudent… Continue Reading

No Presumption of Prudence in Stock Drop Cases, but ESOP Fiduciaries Provided Some Comfort

The U.S. Supreme Court held that ESOP fiduciaries are not entitled to a special “presumption of prudence” when investing plan assets in employer stock.  The Court stated, however, that it is generally prudent to assume that a major stock market provides the best estimate of a stock’s value, in the absence of special circumstances.  In addition, the Court stated that, to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that (1) would have been consistent with securities laws, and (2) a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ____ (2014). The decision can be found here.

Ninth Circuit Overturns Presumption of Prudence in Stock Drop Case

Employees of a drug pharmaceutical company participated in the company’s two 401(k) plans, each of which included an employer stock fund.  Over a period of years, the company used improper marketing tactics which concealed the potentially adverse effects of its drugs.  Once the company’s tactics were exposed, the Food and Drug Administration issued a black box warning for off-label use of the drugs, while subcommittees of the U.S. House of Representatives investigated the drugs and voted to restrict their use and to expand warnings related to their use.  As a result, the employer’s stock lost significant value.  Employees who participated in the 401(k) plans filed a lawsuit claiming several fiduciary violations under ERISA.  The U.S. federal district court dismissed all of the claims.  On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the decision of the district court and remanded. The first ERISA claim was that the… Continue Reading

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