Monday, January 13, 2014
Earlier today I posted about a new article on tightening scrutiny of investment plans and financial products marketed to seniors. On the theme of liability for those who push completely unsuitable investments, I should add that the U.S. Supreme Court recently accepted cert on Fifth Third Bancorp v. Dudenhoeffer, where employees challenged the investment practices of their 401(k) plan administrators. The issue is breach of fiduciary duties for continuing to encourage investment of employee retirement monies in the employer's securities despite the company's deepening involvement in the subprime mortgage market that drastically increased risk.
The plan administrators argue that they are entitled to a "presumption of reasonableness" for investing in employee stock ownership plans (ESOPs) under ERISA law, citing 29 USC 1104(a)(2). The workers challenge application of such a presumption at the pleading stage. They assert continued recommendations to invest, rather than divest, combined with what they believe and allege was the plan administrators' knowledge of the risk, are sufficient to frame a cause of action for violation of fundamental fiduciary obligations under ERISA protections.
I wish I could predict the Supreme Court's action means that employees and retirees will have a better chance of getting past motions to dismiss on pleadings in retirement plan cases. Afterall, even a conservative such as Chief Justice Rehnquist rejected application of heightened standards at the complaint stage as grounds to dismiss civil rights cases, in Leatherman v. Tarrant County Narcotics (1993). But, the fact that the Court accepted cert where the 6th Circuit actually ruled in favor of the employees makes me a little less than hopeful. There is a split in the circuits, with, for example, the 2d Circuit ruling in 2011 in favor of plan administrators on similar allegations in In re Citigroup ERISA Litigation.
Lots of interesting blog commentary on this topic, including SCOTUS Blog.
AARP is filing an Amicus brief for the plaintiffs in the Dudenhoeffer case, as discussed by Drexel Law Professor Lisa McElroy in AARP's Blog.