Plan Beneficiaries Denied Presumption of Prudence

     WASHINGTON (CN) - After Fifth Third Bancorp workers lost most of their retirement savings in the market crash, plan fiduciaries are not presumed to have acted prudently, the Supreme Court ruled Wednesday.
     The market crash caused Fifth Third's stock price to fall by 74 percent between July 2007 and September 2009, and Fifth Third's retirement plan was hit especially hard because its assets were invested primarily in an employee stock ownership plan, or ESOP, which puts funds back into company stock.
     John Dudenhoeffer and other former Fifth Third employees and ESOP participants brought a class action against the financial services firm in Ohio, alleging violations of the duties of loyalty and prudence imposed by the Employee Retirement Income and Security Act (ERISA).
     Both a federal judge and the 6th Circuit found that the plan fiduciaries enjoy a "presumption of prudence," but the appellate court went further by saying that the employees could overcome the presumption by merely showing that "a prudent fiduciary acting under similar circum­stances would have made a different investment deci­sion."
     The unanimous Supreme Court vacated that holding Wednesday, saying that "ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund's assets."
     Though lawsuits of this nature could discour­age employers from offering retirement plans in the first place, the court rejected Fifth Third's claim "that the presump­tion at issue here is an appropriate way to weed out merit­less lawsuits or to provide the requisite 'balancing.'"
     "The proposed presumption makes it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritori­ous, unless the employer is in very bad economic circum­stances," Justice Stephen Breyer wrote. "Such a rule does not readily divide the plausible sheep from the meritless goats. That important task can be better accomplished through careful, context-sensitive scrutiny of a complaint's allegations. We consequently stand by our conclusion that the law does not create a special presumption of prudence for ESOP fiduciaries."
     Breyer added: "To the extent that the Sixth Circuit denied dismissal based on the theory that the duty of prudence required petition­ers to sell the ESOP's holdings of Fifth Third stock, its denial of dismissal was erroneous."