The United States Supreme Court has agreed to hear a case concerning fiduciary responsibility of managers or administrators of ESOP (Employee Stock Option Plans). ERISA (the Employee Retirement Income Securities Act) establishes regulations governing the manner in which companies operate stock option plans for their employees. Congress intended ERISA to give employees the chance to earn prospective retirement income from the stock of their own employer although it does not mandate that ESOPs be constituted exclusively by such stock. Plan Administrators have discretion to include other investments in their Plan.
For years various U.S. circuit courts of appeal have affirmed that, when someone sues a Plan Administrator of an ESOP for breach of a fiduciary obligation or misfeasance in the way in which they make investment decisions, those administrators are presumed to have acted reasonably. The practical effect of this is that, when Plan Administrators are challenged, the plaintiffs bringing such a suit must state in the Complaint initiating the lawsuit assertions indicating the Administrator acted unreasonably. In Dudenhoefer, et. al. v. Fifth Third Bancorp, et. al., 692 F.3d 410 (2012), the Sixth Circuit Court of Appeal departed from this presumption and accepted the mere incorporation of the company’s SEC filings as proof of some abuse of discretion by the Plan Administrators. Decisions by other circuit courts found such filings to be inadequate for the purpose of pleading a case of abuse of discretion by an ESOP Plan Administrator. As this ruling conflicts with the established precedent of the other circuit courts, the Supreme Court agreed to hear the case so as to resolve the conflict.
Two important concepts are at stake in the case, one substantive and the other procedural. The first involves the way in which Plan Administrators make investment decisions for the Plan. The plaintiffs in this case argued that the Administrators should have diversified the investments in the portfolio. The defendants responded that Congress intended for ERISA plans to substantially include the stock of the employee’s company so that beneficiaries can share in the performance of their company’s shares. Second, it involves the manner in which attorneys representing plaintiffs in these cases plead their cases; specifically what verbiage must be included in such a Complaint in order for the case to proceed.
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