Court Reversal Allows Participants to Sue Fifth Third for Company Stock Drop

Plan sponsors that offer company stock in their retirement plan should watch carefully the results of a recent appellate court reversal that will allow participants in .’s defined contribution retirement plan to pursue an ERISA class action against the bank. They claim it endangered their savings by including company stock in their retirement plan shortly before the housing downturn.

The case, Dudenhoefer v. Fifth Third Bancorp., No. 11-3012 (6th Cir., Sept. 5, 2012), joins several recent U.S. 6th Circuit Court of Appeals decisions favorable to ERISA class-action plaintiffs alleging breaches of fiduciary duty. Specifically, this case was the first in which an appeals court held that plaintiffs claimed the defendants, including Fifth Third, its chief executive officer and other officers, violated their fiduciary duty by incorporating by reference certain Securities and Exchange Commission filings into the plan’s summary plan description.

The lower-court decision, filed in 2008 in the U.S. District Court for the Southern District of Ohio at Cincinnati, (No. 1:08-cv-538), earlier dismissed the plaintiffs’ case because employee stock ownership plan sponsors historically are presumed prudent in keeping plan assets invested in company stock because of the nature of the plan. However, the 6th Circuit ruling found “legislative history combined with a natural and clear reading of [ERISA Section] 404 [led] to the inexorable conclusion that ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary except to the extent that the standards require diversification of investments.”

John Dudenhoefer and Alireza Partovipanah, former employees of Fifth Third and participants in its retirement plan, alleged in their suit that, during the class-action period, July 19, 2007, through Sept. 18, 2009, Fifth Third switched from being a conservative lender to a subprime lender and its loan portfolio became increasingly at risk because of defaults. The company either failed to disclose the resulting damage to Fifth Third and its stock or provided misleading disclosures, according to the 6th Circuit Court decision. The price of Fifth Third stock plunged 74 percent during the class period, causing the plan to lose tens of millions of dollars.

The complaint further alleges that the defendants were aware of the risks presented by their investment in the subprime lending market, but through incomplete and inaccurate statements caused the price of Fifth Third stock to be artificially inflated before plummeting. The plaintiffs allege that “[a] prudent fiduciary facing similar circumstances would not have stood idly by as the plan’s assets were decimated.” The bank’s stock was offered to employees as a matching plan contribution from the company but those assets could be moved subsequently by participants to the plan’s other investment options.

The 6th Circuit recalled in its ruling on Fifth Third an earlier decision, Pfeil v. State Street Bank & Trust Co., No. 10-2302 (6th Cir., Feb. 22, 2012), that stated “a fiduciary’s decision to remain invested in employer securities is presumed to be reasonable, the so-called Kuper or Moench presumption.”

In general, plan participants suing employer retirement plans for breaching fiduciary duties by investing in company or other stocks whose value has dropped since the economic crisis started in 2008 have not fared well in court. Often, the sponsors and their investment advisers are protected by the Moench presumption.

For more information about plan sponsors’ fiduciary duties and company stock in 401(k) plans, see Thompson’s employee benefits library, including The 401(k) Handbook.