Supreme Court to Hear ERISA Case on Moench Presumption of Prudence
By Mark Johnson, Ph.D., J.D.


Fifth Third Bank and its officers breached their fiduciary duties of prudence by offering the bank’s stock as an Employee Stock Ownership Plan (ESOP) investment option, allege plaintiffs in a lawsuit that has been working its way through the courts. Fifth Third acted imprudently by doing so, according to the plaintiffs.


On December 13, 2013, the United States Supreme Court agreed to review a 6th Circuit decision in the case Dudenhoefer v. Fifth Third Bancorp that reversed a decision in the U.S. District Court.


In the Fifth Third’s ESOP, employees make voluntary contributions to the plan from their salaries and direct the purchase of investments for their individual accounts. One option at the time was to invest in the company’s own stock. The company matches the first 4% contributed by the employee. Those matching funds are placed in Fifth Third stock, although they can be transferred to other investments. The plan is not required to invest solely in that stock.


The Dudenhoefer case originated when employees of Fifth Third who participated in the company’s ESOP filed a class action under the Employee Retirement Income Security Act (ERISA). The employees asserted that Fifth Third’s actions violated their fiduciary duties by imprudently investing in company stock despite the fact that the company stock price had plummeted.


The District Court ruled that Fifth Third did not violate ERISA because plan fiduciaries are entitled to a presumption of prudence—the Moench presumption discussed below—and that plaintiffs had not overcome that presumption by plausibly alleging that the company had abused their discretion when investing in company stock. The Plan participants appealed to the 6th Circuit, which reversed the dismissal. It is this issue that the Supreme Court will review.


Involved in this case is the so-called “Moench presumption of prudence,” which originated in the 3rd Circuit with Moench v. Robertson. Under the Moench presumption, fiduciaries’ decisions to purchase, hold, or sell company stock are presumed reasonable and are only subject to judicial review if there was an “abuse of discretion.” The question before the Supreme Court is whether the 6th Circuit erred by holding that Plaintiffs did not have to allege in their complaint that the fiduciaries of the ESOP abused their discretion in order to overcome the Moench presumption.


Since 1995, many plan sponsors have been able to rely on the Moench presumption to help defend against breach of fiduciary duty claims regarding company stock funds included in their retirement plans. In Moench, the court stated that proper breach allegations must claim that the company is no longer viable or there has been a precipitous decline in the employer’s stock. Otherwise, the plan sponsor is entitled to a presumption of prudence regarding the company stock fund and, in most circumstances, a lawsuit claiming the fund is simply imprudent would be dismissed.


This defense has been adopted by many circuit courts across the country. In Dudenhoefer, however, the 6th Circuit, in reversing the District Court’s dismissal of the complaint, held that the plan sponsor was not entitled to any presumption of prudence at the beginning or pleading stage of the case. Instead, the court reasoned, those issues, because they are factual in nature, should be decided during the discovery phase of a case.


Fifth Third has asked the Supreme Court to clarify what kind of proof is required to overcome the Moench presumption of prudence. The 6th Circuit, the petition contended, was wrong in failing to require proof that continued investment in company stock was not prudent.


The Department of Labor has filed a brief supporting the Fifth Third plan participants. It is the DOL's position that plan participants should not have to overcome a prudence presumption by establishing that the employer was in imminent financial peril.


The case will likely be heard in March 2014. The outcome will be very important to employer / plan sponsors, fiduciaries and participants, given the broad use of employer stock as at least an option in individual account balance plans.


The case references are Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012), and Moench v. Robertson, No. 94-5637 (3rd Cir. August 10, 1995).


December, 2013



ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.

Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.


ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.


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