Fifth Third Bancorp v. Dudenhoeffer

Background

Fifth Third Bancorp ran a retirement savings plan that let employees invest in several funds, including an ESOP that held mostly Fifth Third stock. Former employees who had money in the ESOP sued company officers who ran the plan, saying they violated ERISA’s duty to act prudently. The complaint says officers knew or should have known by July 2007 that the bank’s stock was overvalued because of public warnings about subprime lending and undisclosed inside problems, but they kept buying and holding the stock. The stock price later fell sharply, shrinking participants’ retirement savings. Lower courts disagreed about whether ESOP fiduciaries get a special "presumption of prudence."

Reasoning

The Court held that ESOP fiduciaries do not get a special presumption of prudence. They owe the same ERISA duty of prudence as other plan fiduciaries, except that ESOPs are exempt from the usual rule requiring diversification. The Court vacated the Sixth Circuit’s judgment and sent the case back to reconsider under the pleading standards from Twombly and Iqbal. It explained that allegations based only on public information are generally implausible because markets reflect public information, and that claims relying on inside information must allege an alternative lawful action a prudent fiduciary could have taken and must account for potential conflicts with securities laws.

Real world impact

The decision means lawsuits over ESOP stock decisions will be judged by ordinary ERISA prudence rules and modern pleading standards. Plan trustees who are company insiders must consider securities-law limits on trading and disclosure when faced with insider-based claims. The ruling is procedural—it sends the case back for further review and does not resolve whether the fiduciaries actually breached their duties.