A June 25th ruling by the Supreme Court cleared the way for workers to bring claims under the Employee Retirement Income Secuirity Act of 1974 against ERISA plan fiduciaries who imprudently allow or require the employees to invest in their employers' stock. But the window of liability for imprudent fiduciaries might not last very long — perhaps less than a quarterly reporting period.

Matching with stock

The decision came in the context of a public employer, First Third Bancorp, that — like many other public companies — matched its employees' voluntary contributions to their 401(k) plans but only with company stock in First Third's employee stock-ownership plan or ESOP.

Investing in company stock creates problems for the 401(k) plan beneficiaries when the company's stock becomes a bad investment. A drop in the stock's market price can badly deplete their nest eggs. But plan fiduciaries, who usually occupy high executive positions with the employer, have powerful incentives to keep the bad news from the shareholders, including the 401(k) plan participants.

Presuming prudence

A majority of federal courts compounded the difficulty by absolving plan fiduciaries of blame even though they knew the stock was in trouble yet continued to allow or require plan participants to own the stock. These courts did so by raising a "presumption of prudence". The presumption protected their decision to buy or hold overvalued company stock unless plan beneficiaries could "make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse." First Third Bancorp v. Dudenhoeffer, No. 12-751, slip op. at 1 (U.S. June 25, 2014).

Writing for a unanimous Court, Justice Stephen Breyer held that "no such presumption applies." Id. "ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general," he wrote, adding the obvious point that the fiduciaries "need not diversify" the assets in the ESOP itself. Id. at 1-2.

Plausible claim?

The balance of the opinion dealt with whether the plaintiffs had stated a plausible claim under Twombly and Iqbal.

The Court had doubts. It pointed to the fact that, as insiders who had access to non-public information about the First Third's true financial condition, the ERISA plan fiduciaries couldn't use their insider knowledge for the benefit of plan participants without risking violation of laws against insider-trading. The Court also noted that  taking steps to halt investment in the ESOP could do more harm to the participants than good by prompting a sell-off of the company's shares, causing the value of the ESOP holdings to plummet. Id. at 18-20.

The Court remanded the case to the Sixth Circuit to sort out whether, in light of the concerns about insider trading and more-harm-than-good, the complaint stated a plausible imprudent investment claim.

Meeting the test

Can the plaintiffs overcome those hurdles?

The answer may turn on whether the fiduciaries could as a practical matter change how the plan sponsor deals with matching contributions and any holding requirement without affecting the market price of the stock. Presumably that could happen, but the fiduciaries would have to take care that they meanwhile complied with all disclosure obligations under applicable securities laws. As companies must report at least quarterly on their financial condition, the period over which an imprudence claim could extend may necessarily last fewer than three months.