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This document summarizes some common questions that plan sponsors and plan committees ask when considering whether to appoint a discretionary independent fiduciary and investment manager for a 401k plan company stock fund.
The biggest value to using an independent fiduciary in this context is that it dramatically increases the likelihood that a plan fiduciary, sued for the drop in value of employer stock held by employees in a benefit plan, can end the case at the motion to dismiss stage. Author reviews why this is.
The Third U.S. Circuit Court of Appeals has issued a new ruling in an ERISA stock-drop lawsuit targeting Johnson & Johnson, affirming the dismissal of the lawsuit as ordered by a district court in May 2020. The new ruling emphasizes that a stock-drop plaintiff must do more than allege a general economic theory of why earlier disclosure of a financial issue would have been preferable.
The 7th U.S. Circuit Court of Appeals in Chicago on August 1 upheld a lower court's dismissal of a case brought against Boeing in 2019 over the drop in Boeing's stock price. One expert attorney says the decision has particular importance to plan sponsors and fiduciaries who have employer stock as an investment.
On August 1, 2022, the United States Court of Appeals for the Seventh Circuit affirmed the lower court's dismissal of a "stock-drop" lawsuit against Boeing. The Seventh Circuit based its conclusion on the fact that an independent fiduciary, rather than the Boeing defendants, had exclusive fiduciary responsibility for the company stock fund and therefore had no duty to disclose corporate insider information to the participants or the independent fiduciary.
Since the Supreme Court's ruling in Fifth Third Bancorp v. Dudenhoeffer, courts around the country have overwhelmingly rejected ERISA fiduciary-breach claims by 401k plan participants seeking relief related to investments in company stock funds. The Seventh Circuit recently continued that trend by affirming the dismissal of claims brought by participants in the Boeing 401k plan but did so on grounds that the fiduciary responsibilities associated with the company stock fund had been delegated to an independent fiduciary, and the insider fiduciaries had no duty to disclose corporate inside information to the plan participants or the independent fiduciary.
If you are approaching retirement and your 401k plan contains significant holdings in appreciated employer stock, you may be able to minimize your tax liability related to that stock. This strategy, which takes advantage of the net unrealized appreciation rules, is not right for everyone, but it is worth exploring before you start withdrawing funds from your 401k plan or rolling them over into an IRA.
A federal judge in Chicago dismissed a stock-drop lawsuit against fiduciaries of Kraft Heinz Food Co.'s defined contribution plans by participants who claimed defendants should have acted to protect participants' investments by disclosing unfavorable financial information. The complaint "is fuzzy on exactly what plaintiffs believe defendants should have disclosed and when," U.S. District Court Judge Robert M. Dow Jr. wrote on Aug. 23.
After more than five years of litigation and a trip to the Supreme Court, the ERISA stock-drop litigation against fiduciaries for IBM's employee stock ownership plan has ended with a modest $4.75 million settlement. The opinion of the 2nd US Circuit Court of Appeals in the case -- which found plaintiffs' pleadings sufficient to survive a motion to dismiss -- still stands, possibly leaving a narrow path for future stock-drop litigation.
The essence of the suit was that the employer's stock price dropped suddenly and plaintiffs argued that the plan fiduciaries -- who allegedly had awareness of the news and its impact before its public disclosure -- had an obligation to alert/take action concerning the retirement plan accounts that had invested in the employer stock. After nearly six years of litigation, the settlement terms of an ERISA litigation case that went to the U.S. Supreme Court have come to light.
A U.S. District Court in Newark, N.J., dismissed a complaint by participants in three Johnson & Johnson 401k plans, who alleged that plan fiduciaries failed to protect their investments in company stock offered as a plan investment option. The participants argued that Johnson & Johnson fiduciaries should have acted following allegations that talc and asbestos had been found in some company products. The resulting controversy depressed Johnson & Johnson's stock price.
A recent analysis from Vanguard explores the gradual abandonment of company stock in DC plans. The Vanguard analysis found demographic characteristics such as age, income, education, job tenure, and nonretirement wealth, while statistically significant, are not strongly related to the percentage of company stock in a participant’s account balance. The researchers found plan sponsor design decisions have the strongest relationship to the proportion of participant holdings in employer stock.
Employers continue to evaluate company stock in light of litigation and single-stock risk as well as its impact on retirement accumulations. Plan sponsor interest surged in response to the 2014 Dudenhoeffer case. This 16-page paper begins with an overview of factors unique to company stock in DC plans. Next, it provides an overview of the characteristics of plan sponsors that actively offer company stock and the nature of company stock restrictions. It then considers two simple regression models, incorporating both participant demographics and plan design features, that examine holdings of company stock. Finally, it concludes with a discussion of our findings and with implications for plan sponsors.
The Eighth Circuit has affirmed the dismissal of two cases in which plan participants claimed that their plan's fiduciaries breached their duties of prudence and loyalty by failing to act on nonpublic information about events that later caused a substantial drop in the value of their employer's stock. In each case, the participants argued that they met the pleading standard established in the Supreme Court's Dudenhoeffer decision.
With the wave of stock drop litigation a decade ago, the offering company stock in defined contribution plans has decreased. But, should plan sponsors offer company stock as an investment option? Robyn Credico, North America Defined Contribution practice director at Willis Towers Watson in Arlington, Virginia, says -- from a participant and fiduciary risk perspective -- no.
As automatic and Roth features have grown more popular, another trend is clearly on the wane: company stock on the 401k-plan menu. Whereas nearly half of employers offered company stock in their 401k plans a decade ago, either as part of the plan menu or as part of an employee stock-ownership plan, that figure had dropped to less than 40% as of 2016, according to Callan. Why the demise?
The U.S. Second Circuit Court of Appeals overturned a lower court's dismissal of a "stock drop" case in a way that could add to the list of allegations participants might use to overcome employers' motions to dismiss these types of cases. Although this case involved an employee stock ownership plan, the holding could equally apply to a 401k plan that has company stock as a participant-directed investment option.
Plaintiffs allege plan fiduciaries should have known the company's stock price was artificially inflated and that fiduciaries breached their duties of prudence and loyalty by continuing to offer J&J stock in the retirement plan.
With the PG&E bankruptcy, inquiring minds want to know if there was company stock held in the 401k plan? Well yes, there was. At least as of Dec. 31, 2017, the 401k plan contained $720,647,988 of PG&E stock. That was approximately 11 percent of the total asset base in the plan at that time.
The United States Court of Appeals for the Second Circuit issued a rare procedural victory to "stock drop" plaintiffs. The Jander ruling is a notable development that has already and will likely continue to encourage further stock drop litigation, and could also require plan fiduciaries to consider difficult questions about disclosure as a way to potentially limit litigation exposure.
Including company stock among the investments in your 401k plan can be powerful. It gives employees a voice in the firm's direction, pride of ownership, and a direct correlation between their job and company performance. At the same time, employees should understand how to use company stock wisely as a 401k plan investment.
The United States District Court for the District of Minnesota has, for a second time, dismissed claims by participants in the Wells Fargo 401k plan. This second decision focused on the issue of the fiduciary duty of loyalty, the court's discussion of which is thorough and interesting both in its specific application to stock drop cases and to fiduciary litigation more generally. In this article we discuss the court's opinion in detail.
In this case, the alleged knowledge of an artificially high stock price was rooted in the fact that the company had not disclosed that employees of its foreign subsidiaries had violated the Foreign Corrupt Practices Act of 1997 by paying bribes to foreign government officials.
A U.S. District Court judge in Minneapolis dismissed for the second time a lawsuit by participants in the 401k plan of Wells Fargo & Co., saying plaintiffs failed to prove their complaints of fiduciary breaches regarding the management of a company stock fund within the plan.
Source: Investmentnews.com (registration may be required), July 2018
Verizon, Target, Comcast, and Microsoft are among the growing number of public companies rethinking the wisdom behind offering their own stock as an investment option in their workers' 401k plans. In the last five years, some of the country's largest employers have taken steps to reduce or eliminate the company stock held in their retirement plans, according to securities filings reviewed by Bloomberg Law.
Source: Bna.com (registration may be required), March 2018
PSCA's recent survey shows that 18% of plans still offer company stock, and that 14% of all plan assets are invested in company stock. If you offer company stock as an investment option in your retirement savings plan, you may want to take another look at what you offer and how those investments are communicated to participants.
Employee stock purchase plans are becoming more popular among larger public companies at the same time employees have reduced the amount of company stock they purchase within their 401k plans.
Source: Benefitnews.com (registration may be required), September 2017
There are several valuable reasons why companies include employer stock in 401k plans. However, increased risk of litigation has caused many employers to reconsider the decision to offer employer stock as an investment option. This article outlines initiatives for plan sponsors to consider when deciding to maintain or discontinue their employer stock offering.
Arch Coal defeated a lawsuit by employees accusing it of failing to divest their 401k plan of the company's stock during a three-year period when its value declined from $680 to $1.42 per share.
Source: Bna.com (registration may be required), August 2017
Aon is terminating the company stock fund as an investment option in its $5.3 billion 401k plan. The Aon Stock Fund will be liquidated and removed from the plan by the end of December 2017, the company said in its latest filing with the Securities and Exchange Commission.
Source: Bna.com (registration may be required), July 2017
Marathon Petroleum executives are accused in a new lawsuit of wrongly allowing workers to invest their retirement savings in the stock of Marathon Oil Corp.
Source: Bna.com (registration may be required), July 2017
This article examines the quandary that employer stock funds pose for plan sponsors, who must navigate ERISA's careful balance of (1) ensuring fair and prompt enforcement of employee rights under employer-provided retirement plans while (2) encouraging employer creation of these plans.
On September 22, 2016, the SEC released a Compliance and Disclosure Interpretation addressing the application of the registration requirements to offers and sales of employer securities under 401k plans that (i) do not include a company securities fund but (ii) do allow participants to select investments through a self-directed brokerage window. Open brokerage windows typically allow plan participants to invest their 401k accounts in publicly traded securities, including, in the case of a public company employer, company stock.
The SEC recently published a new interpretation discussing the requirements for registering an offering of employer stock on a Form S-8. Question 139.33 discusses whether an employer must file a Form S-8 registration statement for employer stock if the stock may be purchased by 401k plan participants through a brokerage account window.
The SEC recently weighed in on whether offering a brokerage window in a 401k through which investments in employer securities can be made involves an offer of employer securities requiring Securities Act registration.
Financial researchers agree that allocating money to employer stock in a 401k plan is a poor strategy, yet many employees do so. This research finds evidence that social conformity contributes to this selection. Specifically, the percentage allocated to company stock by employees in the 401k plan is positively related to both the net open-market purchases of company stock by management and the percentage of the defined benefits plan invested in company stock.
One recent Securities and Exchange Commission filing offers an unusually granular glimpse into how much risk some employees take with their retirement money by having an overconcentration of company stock in their 401k plan.
Recognizing the new pleading standards set forth in Fifth Third v. Dudenhoeffer, the lawsuit suggests alternative actions plan fiduciaries could have taken rather than continuing to allow investments in company stock.
Two Edison International Inc. executives convinced a federal judge to dismiss a lawsuit attacking their decision to offer workers Edison stock in the company's 401k plan.
Three companies are removing or have removed employer-stock funds from six defined contribution plans, according to the companies' recent 11-K filings with the Securities and Exchange Commission.
Company stock in your 401k has special rules, specifically an available tax treatment called Net Unrealized Appreciation. Under the right circumstances, you pay only the capital gains tax rate on appreciation, rather than regular income rates. Proceed with caution any time you consider selling, rolling over, or withdrawing shares of company stock in your plan.
The complicated litigation Whitley v. BP PLC is just the latest stock drop case to be impacted by the big-ticket Supreme Court decision in Dudenhoeffer v. Fifth Third Bancorp, this one earning "friend of the court briefs" from both DOL and SEC.
In Harris v. Amgen, the U.S. Supreme Court recently reversed, for the second time, a decision by the U. S. Court of Appeals for the Ninth Circuit holding that participants in an employee stock ownership plan had validly stated a claim that plan fiduciaries had breached their duty of prudence by continuing to invest ESOP assets in employer stock.
In Tatum v. R.J. Reynolds Tobacco Co., on remand from the US Court of Appeals for the Fourth Circuit, the Middle District of North Carolina applied the standard provided by the Fourth Circuit and held that a hypothetical prudent fiduciary would have decided to divest Nabisco company stock funds from its 401k plan, and that the plan fiduciaries were therefore not personally liable for damages.
Based on Dudenhoeffer and Amgen, it is clear that the Supreme Court believes that requiring specific, plausible allegations in the plaintiff's complaint will help avoid frivolous 401(k) stock-drop suits from surviving beyond a motion to dismiss. However, it is likely that future plaintiffs will use the road map provided in those cases to craft complaints that are likelier to survive a motion to dismiss in hopes of reaching a settlement or receiving a favorable judgment.
Many observers believed Fifth Third Bancorp v. Dudenhoeffer would significantly increase litigation concerning company stock in retirement plans. That clearly has not happened yet. In tracking this type of litigation since 1990, there have been far fewer lawsuits initiated over stock-drop issues after the Dudenhoeffer ruling than in the years before the decision.
Is the company stock option a legacy feature that needs a closer look? This article revisits the role of company stock in a defined contribution plan. It's a role that is changing.
Defined contribution plan participants have been advised for decades on the benefits of diversification, but many still hold large portions of their account balance in employer securities. That poses risks not only for the participants, but for plan sponsors as well.
Company stock has a long tradition in retirement plans, but sponsors should consider taking a more proactive approach to managing and monitoring company stock as an investment option for their participants. Article provides steps to ensure your company stock policies helps protect you and your participants.
The findings of this survey of 160 employers with company stock in their DC plans show that companies are paying close attention to the Fifth Third decision. A majority of responding companies have reviewed or are planning to review their procedures for monitoring company stock, investment policy statements and plan documents. In addition, more than one-third already have or are considering retaining a third party as an independent fiduciary, and slightly more than one-fourth have initiated or are considering the elimination of company stock.
How can it possibly make any sense to have company stock holdings in a 401k plan or to have company matches to retirement savings be in the form of company stock? The author's answer is it doesn't. So, if it doesn't make any sense from the perspective of a participant, then how can it ever be a prudent decision for a fiduciary?
Companies with high levels of their own stock in their retirement plans often fail to scale back their exposure even when they're heading into financial straits, according to a new study. The result, the study said, can lead to significant losses to participants' retirement savings, suggesting a need for limits on how much such stock should be held by a company plan.
401k plans have made great strides in recent years--reducing costs, simplifying investment menus, and automating portfolio allocation. Even the concentrated ownership of company stock in retirement plans is less common than a few years ago. Still, it's no less risky.
Since 2005, the incidence of company stock in DC plans has declined. Fewer plans offer employer stock and fewer participants hold concentrated company stock positions in their retirement savings accounts. A higher proportion of plans offering company stock now impose restrictions on the option. This is an update of prior research on the changing nature of company stock in employer plans
The Dudenhoeffer ruling, while on its face benefitting participants in employer stock plans by eliminating a common defense to suits challenging declining stock value, but the ruling also erected significant barriers for plaintiffs bringing stock-drop claims, attorneys said in a panel presentation.
For plan administrators, the UBS litigation underscores the potential insulating effect of drafting plan documents that require investment in the company's own stock. For practitioners on both sides, the District Court's decision is a reminder always to consider fundamental, threshold issues such as standing when bringing or defending an ERISA case.
This article deals with DC litigation around company stock and the potential effect of the recent Supreme Court decision in Fifth Third Bancorp v. Dudenhoefferon. It suggests that the risk to plan sponsors of offering company stock may be slightly higher given the Court's rejection of the presumption of prudence and explains that simply "hardwiring" company stock into a DC plan document and then following the document without more process will not be sufficient.
Most public companies offer a company stock fund investment option under their 401k plans and non-qualified excess 401k plans. On September 10, the SEC announced enforcement actions against 34 companies and insiders (directors, officers, and 10% owners) for failing to file timely reports for stock transactions. The enforcement actions came without warning, after more than a decade of little or no SEC enforcement in this area.
Congress knew that holding large amounts of employer stock in a company's pension plan created significant tension between the intrinsically high risk of a single stock and the demands of a fiduciary's standard of conduct. Five page article gets into detail on the legal and fiduciary foundation of holding employer stock in a plan.
Source: Erisafiduciaryadministrators.com, August 2014
The practice of throwing company shares into retirement plans has been waning for some time, but a recent Supreme Court decision could hasten its demise. ERISA experts say the blow to the Moench Presumption is just one more among many reasons to leave company stock out of retirement plans.
The U.S. Supreme Court held that there is no special presumption of prudence applicable to fiduciaries with respect to employer stock. The Court has, however, provided a roadmap to the lower courts to use in evaluating whether a claim can proceed, the threshold for which may not be particularly easy for plaintiffs to meet. This roadmap also serves as guidance to plan fiduciaries in connection with employer stock investments.
Employers will have to think twice about offering company stock as a retirement option after the U.S. Supreme Court removed a key protection against lawsuits claiming it was imprudent to hold the shares in individual retirement accounts.
Company stock has historically played an important role within certain DC plans in the United States, particularly those sponsored by large firms. This report begins with an overview of factors unique to company stock in DC plans. Next it provide an overview of the characteristics of plans sponsors actively offering company stock and the nature of company stock restrictions. Then the report considers two simple regression models, incorporating both participant demographics and plan design features, to examine holdings of company stock. Finally, report concludes with a discussion of findings and with implications for plan sponsors.
Recently the U.S. Supreme Court announced that it will review Fifth Third Bancorp v. Duddenhoeffer, a case about the appropriateness of offering company stock in a 401k plan. Why would the federal government be concerned about company stock in 401k plans? Here are some potential reasons.
A recent Northern District of Georgia case illustrates how, by having clear language in the plan documents, employers can protect fiduciaries from risks of fiduciary liability associated with having a company stock fund among their defined contribution plan investments.
This paper will provide an overview of the various considerations for plan sponsors that currently include employer stock or are thinking about doing so should be aware of. Paper includes an overview of: employer stock in 401k plans today, fiduciary considerations for plan sponsors, the human capital dynamic, and other risks associated with holding an individual security.
Employer stock is still a common investment in 401k plans, although it is becoming less common. Past research has noted mixed findings regarding the potential benefits and costs associated with owning employer stock. This paper explores the historical relationship between employee stock ownership in 401k plans and subsequent company stock return. Over the time period studied, authors find that firms with comparatively high allocations to employer stock in 401k plans have tended to underperform those without.
Because of the fiduciary implications, the inclusion of company stock within a retirement plan has been a frequent target of litigation in recent years. A substantial body of case law has been developed regarding the standards that apply to judicial review of fiduciaries' decisions regarding company stock. A trio of cases from last year, however, underscore that courts may take different approaches in reviewing fiduciary actions.
Plan sponsors offering employer stock funds should evaluate whether they should separate the SPD/prospectus into two documents. The Dudenhoefer decision increases the risk that plan fiduciaries may be held responsible for a breach of fiduciary duty in the event statements in the SEC filings (that are incorporated by reference in the SPD) are found to be misleading or incorrect. Separating these documents increases the likelihood that a court would view the SEC filings as distinct from an ERISA document.
Following the holiday season, many will feel the effects of overindulging on festive sweets. It turns out that your 401k also suffers when indulging on too much of a good thing. When choosing 401k investments, many employees have the option to buy an ownership stake in the company by electing to purchase employer stock. Management encourages this type of investment because employees will think more like owners. But employees should carefully consider before loading up on company shares.
If you hold your employer's stock in your 401k dump it; if you are a plan sponsor you should terminate any option for company stock in your plan. In fact, the SEC and Department of Labor should prohibit it.
Historically, company stock has played an important role in some DC plans, but the incidence of company stock in DC plans has declined. Employer-directed contributions remain the dominant factor associated with participants holding a concentrated position in company stock. Vanguard Center for Retirement Research looks at how company stock is offered in plans today and examines participant utilization of company stock.
Source: Vanguard Center for Retirement Research, March 2012
Given the Second Circuit's embrace of the presumption of prudence standard, it is incumbent on all 401k plan fiduciaries to again review their 401k plan's company stock investment language. Properly drafted company stock language may help ensure the presumption of prudence is applied in the event the price of company stock rapidly declines.
For the second time in 2011, the DOL has issued an ERISA advisory opinion that considers the PTE 84-14 qualified professional asset manager (QPAM) exemption, this time in the stable value context. PTE 84-14 provides helpful and widely utilized relief for transactions between an "investment fund" managed by a QPAM and a party in interest to employee benefit plans invested in that fund.
Source: Sutherland Asbill & Brennan LLP, June 2011.
Given the current wave of lawsuits over plummeting stock prices and retirement plan mismanagement relating to company stock, it is more important than ever to be aware of the risks of fiduciary liability associated with offering company stock in a retirement plan.
Among plans offering company stock, the number of participants holding a concentrated position (more than 20% of their account balance) fell from 42% in 2005 to 30% in 2009, according to How America Saves 2010, our annual report on Vanguard-recordkept DC plan data.
In favorable economic times, offering company stock as an investment option allows employees to share in the success of the company, engendering a sense of loyalty by linking the employee's and employer's fortunes together. But when things go awry, that same loyalty often disintegrates into allegations of fiduciary misconduct, lawsuits and financial settlements. So what can other fiduciaries learn from these situations?
The Internal Revenue Service is issuing final regulations under section 401(a)(35) of the Internal Revenue Code relating to diversification requirements for certain defined contribution plans holding publicly traded employer securities.
After thousands of employees at now-defunct corporations such as Enron and WorldCom saw their retirement savings wiped out early in this decade, things were going to be different. But efforts to wean employees from in-house shares have gone begging.
Corporate scandals and the stock market's ups and downs have created new challenges for 401k plan sponsors and fiduciaries, but they appears to be rising to the challenge. This article outlines some of the actions taken by plan sponsors.
Recent cases provide some insight into how the courts are dealing with this ongoing issue as it relates to 401k company stock cases which are making their way through the courts. There are now a whole host of recent cases (stemming from the economic turmoil of the past few years) which have made it past the motion to dismiss phase, two of which have seemingly reached opposite results on the issue and are worthy of discussion.
Source: Benefitsblog.com, May 2004.
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