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Pension Plans That Own Employer Stock Are Not Entitled to Special Protections Above and Beyond the Requirements of ERISA

By Jeffrey A. Herman

 

Pension benefits provided by an employer are governed by the Employee Retirement & Income Security Act (“ERISA”). If anything happens to an employee’s benefits—for example, if they are mismanaged, modified, denied, or just outright terminated—a lawsuit has to be brought under ERISA.

 

ERISA is a complex and restrictive federal statute that generally favors employers and insurance companies over employees. The courts have not made it any easier on employees. For whatever reason, many federal courts have taken it upon themselves to chip away at employees’ rights and make it harder for them to sue or win.

 

Recently, the U.S. Supreme Court decided the fate of one pro-employer rule federal courts had created for certain pension plans. Specifically, this rule concerned what are known as “employer stock ownership plans” (“ESOPs”). In an ESOP, the pension plan invests its assets in the employer’s stock. So, for example, if you work at Company X, your pension plan would buy stock in Company X. That way, employees benefit when the company they work for grows.

 

However, every pension plan has a duty to prudently manage its assets, including a duty to diversify those assets to minimize risk. But not diversifying is exactly what an ESOP does. All ESOPs would necessarily be acting imprudently and breaking the law. To fix this—and to encourage the formation of ESOPs—Congress amended ERISA so that the diversification requirement is not violated by purchasing or holding employer stock.

 

That seems fair. ESOPs can still fail to prudently manage their assets, but simply failing to diversify is not one of those ways.

 

Many federal courts, however, went a step further than what the law said. Those courts applied a “presumption of prudence” rule to allegations that ESOPs acted imprudently. In other words, ESOPs—unlike other types of pension plans—were entitled to a presumption that they did not act imprudently.

 

Instead, those courts put the burden on employees to allege and prove that extraordinary circumstances were present. For example, some courts required employees to show the employer was “on the brink of collapse” or “undergoing serious mismanagement.” This significantly reduced the number of employees who could ever hope to prevail against their ESOP. The rule created an uphill battle just for employees to get past the door to the federal courthouse. And so winning against an ESOP became that much harder.

 

In Fifth Third Bancorp. V. Dudenhoeffer, however, a unanimous Supreme Court wisely put an end to the presumption of prudence. The Court recognized that Congress already told courts how to treat ESOPs: they have no duty to diversify. That’s it. ERISA did not authorize or require courts to create even further protections for ESOPs at the expense of employees.

 

Dudenhoeffer is a victory for employees, who no longer face an extra, court-created barrier to protecting their pension benefits under ERISA.

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