If Your Retirement Plan Holds Employer Securities, Keep an Eye on the Jander Case

“Employer securities” in retirement plans have been the source of a significant amount of litigation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  In general, “employer securities” are common stock issued by an employer of the employees covered by the retirement plan.  In many cases, “employer securities” are traded on a national exchange which is registered with the U.S. Securities and Exchange Commission (the “SEC”).

In relevant part, ERISA Section 404 contains an exclusive purpose requirement which requires a fiduciary to act for the exclusive benefit of plan participants and beneficiaries, and a prudence requirement which requires a fiduciary to act with due care, skill, prudence and diligence of a prudent man acting in a like capacity.

Prior to 2014, if the retirement plan document contained language requiring “employer securities” to be offered as an investment option, the courts typically held that the fiduciary was entitled to a presumption that he acted consistently with ERISA.  This presumption of prudence was articulated in Moench v. Robertson, 62 F. 3d 553 (3rd Cir. 1995) and was referred to as the “Moench presumption.”

The “Moench presumption” could be rebutted by a showing that the ERISA fiduciary could not have reasonably believed that continuing to follow the plan document’s direction to invest in employer securities was prudent behavior.  Generally, the courts required significant adverse factors to rebut the Moench presumption (i.e., such as the fiduciary’s knowledge of an impending bankruptcy of the plan sponsor).

In 2014, the U.S. Supreme Court released Fifth Third Bancorp v. Dudenhoeffer, 134 S.C. 2459 (2014) which rejected the “Moench presumption” in favor of the general ERISA prudence requirement.  In Dudenhoeffer, the plaintiff asserted that the fiduciaries behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were company insiders.

In Dudenhoeffer, the Supreme Court announced the following three factor standard:

“To state a claim for a breach of duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities law and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

While the standard appears to be relatively straight forward, the three Dudenhoeffer factors (described below) have been difficult to apply in practice.

The first Dudenhoeffer factor is that the duty of prudence “does not require a fiduciary to break the law.”  The Supreme Court noted that ERISA’s duty of prudence cannot require a fiduciary to perform an action that would violate securities laws (e.g., such as deciding to sell the plan’s employer securities based on nonpublic information).

The second Dudenhoeffer factor is, that when a complaint faults fiduciaries for failure to act, “[t]he courts should consider the extent to which the ERISA-based obligation to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws. . . .”  Significantly, the Supreme Court noted that the SEC has not advised the courts on its views on these matters and that the Supreme Court believed that the SEC’s views were relevant.

The third Dudenhoeffer factor is whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that an alternative action that the defendant could have taken would do more harm than good to the investment of the employer securities in the retirement plan.

After 2014, the Dudenhoeffer standard has foreclosed the argument that a fiduciary should have used “inside information” in support of an action to purchase or sell “employer securities.”  Thus, subsequent litigation has generally been limited to whether the ERISA fiduciaries may be required to disclose inside information that may impact the value of the “employer securities” or may have to refrain from making additional purchases of “employer securities”.

Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2nd Cir. 2018) deals with these issues.  In Jander , the plaintiffs were  participants in the IBM retirement plan which invested in IBM common stock.  During the relevant period, the members of the IBM retirement plan committee included IBM’s Chief Accounting Officer, Chief Financial Officer, and General Counsel (the “Plan Defendants”).

In the complaint, the plaintiffs alleged that: (1) in 2013, IBM began trying to sell its microelectronics business (the “Business”); (2) IBM failed to disclose certain losses and other liabilities at the Business; (3) the Plan Defendants knew or should have known about the undisclosed issues at the Business; (4) in connection with the sale of the Business, IBM had to take a $4.7 billion pre-tax charge (which resulted in a price decline in excess of $12 per share in the value of the “employer securities”); and (5) that once the Plan Defendants learned that IBM’s stock price was artificially inflated, they should have either disclosed the truth about the Business’ value or “issued new investment guidelines that would temporarily freeze further investments in IBM stock”.

The trial court dismissed the case holding that the alternative actions that the plaintiff alleged were available to the Plan Defendants might have caused more harm than good to the plan’s assets (i.e., failed to satisfy the third Dudenhoeffer factor).

Upon appeal, the Second Circuit Court of Appeals reversed and remanded, holding that Jander had sufficiently plead that no prudent fiduciary could have concluded that the disclosure of the Business’ undisclosed issues would do more harm than good.  Significantly, the Court of Appeals did not rule on the potential conflict between the ERISA’s prudence requirements and the federal securities law’s corporate disclosure requirements (i.e., the second Dudenhoeffer factor).

Upon appeal to the U.S. Supreme Court, the Supreme Court vacated and remanded the case back to the Court of Appeals.  The Supreme Court held (1) that the Court of Appeals did not address whether ERISA’s duty to disclose conflicted with the corporate disclosure requirements imposed by federal securities laws; (2) that in Dudenhoeffer, the Supreme Court noted that the SEC’s views might be relevant; and (3) that the Court of Appeals should have an opportunity to decide whether to entertain arguments on this issue (i.e., allow the Court of Appeals to obtain SEC guidance and rule on the second Dudenhoeffer factor).  See Retirement Plans Committee of IBM v. Larry Jander, 2020 WC 201024 (2020).

With the case at the 2nd Circuit Court of Appeals, there is an expectation that the Court of Appeals will consider the second Dudenhoeffer factor.  Hopefully, the Court of Appeals will provide guidance as to how plan fiduciaries should address the potential conflicts between ERISA’s prudence requirements and the federal securities law’s requirements.  In any event, fiduciaries of plans holding “employer securities” should be aware of the issues raised by the Jander case and should be prepared to re-examine their plan’s investment in “employer securities” upon release of subsequent opinions.

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