In what circumstances should you be permitted to invest your retirement savings in your own employer’s stock? We have blogged before about an ERISA class action pending at the Supreme Court regarding when plan fiduciaries must prevent participants from investing in employer stock. After the Solicitor General filed an amicus brief (pdf) asking the Court to broaden its inquiry, the case was poised to challenge a bedrock of ERISA stock-drop actions—a presumption that fiduciaries act prudently when investing in employer stock.

On Friday, the Supreme Court granted certiorari in the case, Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, but did not accept the Solicitor General’s request to have the parties brief the appropriateness of the presumption of prudence. Rather, the Court left intact the question presented by the petition, which concerns only the applicability of the presumption at the motion-to-dismiss stage.

A bit of background: As a general rule, the fiduciaries who administer ERISA-governed retirement plans owe a duty of prudence to plan participants. But although many investment advisors would warn investors not to invest substantial portions of their retirement savings in a single stock, Congress wanted to encourage employees to invest in their companies. So it waived the duty of prudence “to the extent that it requires diversification” for purchases of company stock. 29 U.S.C. § 1104(a)(2).

Of course, the risk of a non-diversified portfolio is that an individual stock will lose value. When that happens, securities-fraud class actions are commonplace, as are ERISA class actions that argue that retirement plan fiduciaries should have forced plan participants to sell their employer stock. Nearly 20 years ago, the Third Circuit recognized the tension between such claims and Congress’s goal of encouraging employee ownership. Under Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), which has been adopted in varying forms by seven federal courts of appeals, when a plan sponsor requires or encourages plan fiduciaries to invest in employer stock, plan fiduciaries are not generally liable for permitting such investments—unless the employer was in such dire financial straits that the company’s viability as a going concern was in doubt.

Despite the general agreement among the courts of appeals, the Labor Department has long disagreed with the Moench presumption. But as the presumption has gained acceptance in the lower courts, the Supreme Court has exhibited no particular interest in adopting a different course. The Court’s order in Fifth Third signals, if anything, that the Justices are not particularly eager to enter the fray now. That’s a sensible outcome. The Supreme Court rarely will address an issue that the parties did not contest below. And there are good reasons—grounded in Congress’s special dispensation for employer stock—why the courts of appeals have been reluctant to saddle employers with liability for stock-market volatility.

At a minimum, this case will determine what a plaintiff must allege to survive a motion-to-dismiss and to obtain discovery. And the Court is not precluded from resolving the broader issue when the case is decided this spring. That would be a substantial undertaking, however, because the Moench presumption implicates big questions for ERISA class actions:

  • When plan fiduciaries are instructed by the plan sponsor to invest in employer stock, they face a potential conflict between the terms of the plan and the duty of prudence. When must a fiduciary disregard the terms of the plan? See 29 U.S.C. § 1104(a)(2)(D).
  • If the purpose of diversifying investments is to “minimize the risk of large losses,” how (if ever) does a plan fiduciary violate the duty of prudence by permitting plan participants to sustain large losses through an investment in employer stock? See id. § 1104(a)(1)(C), (a)(2).
  • Do fiduciaries face the same prudence obligations when they affirmatively invests plan participants’ retirement assets (as in a defined-benefit pension plan) as when they merely offer investment options among which plan participants will construct a portfolio (as in a 401(k) plan)?

To see whether the Court answers those questions, we will have to await the argument and decision.