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U.S. Supreme Court hears ERISA case

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An Employee Retirement Income Security Act that came before the U.S. Supreme Court this month has raised some interesting questions and prompted debate about employee stock option plans. The questions asked by the justices and the arguments made by both sides deal with the underlying conflicts of interest for those managing ESOPs and questions of the true purpose of these plans.

The case originated with a lawsuit filed by plaintiffs who invested in Fifth Third Bancorp's ESOP. According to the suit, the fiduciaries of the ESOP continued to offer the option of purchasing the company's stock even as it lost nearly three-fourths of its value between 2007 and 2009 when the company was impacted by the subprime mortgage crisis. The district court that heard the case dismissed it, but the Sixth Circuit reversed that decision.

One of the issues discussed is the so-called "presumption of prudence." This presumption requires plaintiffs to show that a reasonable fiduciary would have dropped the stock from its plan options based on its performance.

Some of the justices' questions involved how a prudent ESOP fiduciary should deal with inside information that could impact the stock price and the "irreconcilable quandary," as one ERISA expert put it, it presents for fiduciaries. By acting on such information, they could be violating securities laws. Questions were also raised about whether company executives should be prohibited from serving as fiduciaries and whether fiduciaries should even be allowed to have inside information.

The purpose of an ESOP was also a topic of debate. The attorney representing Fifth Third said they are first and foremost a way to provide employees with ownership in their company. The plaintiffs' attorney, however, noted that under ERISA, ESOPs are indeed meant to serve as retirement plans. He said that ESOP fiduciaries, therefore, have many of the same responsibilities as retirement plan fiduciaries.

Court watchers say that the justices' ruling and particularly their decision around the "presumption of prudence" could impact how companies handle ESOPs. Some companies may even decide not to offer them going forward.

Any investing, whether within a company plan or on your own, should not be undertaken lightly. All investors should get expert advice, whether by consulting your financial and legal advisors or by gathering as much information as possible on your own.

Source:  Bloomberg BNA, "Justices Hear Arguments in First ERISA Stock-Drop Case to Reach High Court" Jacklyn Wille, Apr. 03, 2014

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