Look Out Below

Employee 401(k) and other pension plans that include company stock can be a financial minefield. What’s a responsible fiduciary to do to lessen the risk of a plummeting share price—and the risk of a subsequent “stock-drop” lawsuit from aggrieved workers?

Navigating Employee 401(k) and Pension Plans
Mary Jo Larson

Mary Jo Larson

September 8, 2021 03:00 PM

Many businesses offer, or even mandate, company stock as an investment option for employees in their 401(k) or other retirement plans. The reason for doing so is clear: Those same staffers are working for the betterment of the business and therefore have skin in the game. The better the company does, the better they do. When company stock funds suffer a significant loss, though, these same plans can beripe for lawsuits.

In these cases, commonly referred to as “stock-drop” litigation, retirement-plan participants sue plan fiduciaries, including their plans’ investment committees, typically arguing that the fiduciaries had sufficient information to avoid, or at least dampen, the negative impact from the stock’s decline. This creates a high-risk environment for fiduciaries, even when employer stock is a required option under the company plan.

Many cases in this area are being filed and litigated, although recent court decisions have made it more difficult for plaintiffs’ stock-drop claims to succeed. The key decision was a 2014 U.S. Supreme Court ruling in Fifth Third Bancorp v. Dudenhoeffer. Before this case, if the plan document required employer stock to be offered, lower courts applied a presumption that the fiduciaries acted prudently in continuing to follow plan terms and maintain employer stock in the plan, even in the face of significant drops in value. In Dudenhoeffer, though, the Supreme Court found that the ERISA fiduciary “duty of prudence trumps the instructions of a plan document”— meaning fiduciaries are no longer entitled to the presumption of prudence.

At the same time, however, the Supreme Court created a new pleading standard for employer stock cases, stating: “Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim.”

Under Dudenhoeffer, to avoid dismissal, the plaintiff must plausibly allege either (or both):

  • that public information revealed “special circumstances” that made the market price of a publicly traded stock unreliable;
  • that nonpublic information known by the fiduciary should have caused them to take alternative action “that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.” In other words, if a prudent fiduciary could have concluded that the proposed action would harm the fund more than help it, the claim will not stand. (This is known as the “Not More Harm Than Good Standard.”) Many cases have since interpreted this cornerstone case.

PUBLIC INFORMATION AND SPECIAL CIRCUMSTANCES: None of the more than 100 stock-drop decisions that have come after Dudenhoeffer has found publicly known circumstances that made the stock’s market price unreliable. At this time, it’s difficult to imagine what “special circumstances” would support a stock-drop claim.

NONPUBLIC INFORMATION: Fiduciaries or other company employees may learn of nonpublic information that, if known, would likely reduce the stock’s price. Dudenhoeffer’s fair-market-price presumption does not protect fiduciaries if they have information the public lacks. When material facts become public information, plan participants can experience significant drops in the value of the stock in their accounts. Participant lawsuits then allege the fiduciaries should have done something to prevent those losses, such as:

  • stop making contributions in employer stock;
  • remove employer stock as an investment option for future contributions or investment exchanges, or further limit how much any single participant can invest in employer stock;
  • sell the stock held by the plan;
  • disclose to the participants the relevant facts so they can intelligently decide whether to continue to invest in company stock;
  • publicly disclose the relevant facts or ask the appropriate corporate officers to do so;
  • hire an independent fiduciary to make a decision about the stock; or
  • disclose any negative facts to the Department of Labor and request guidance.

The problem is that any of these actions could damage the stock price and leave the participants even worse off. As one court noted, “[P]ublicizing all of the negative insider information alleged by Plaintiffs would guarantee the collapse of company stock.” The court found it was “simply implausible to say that a reasonable fiduciary could not have concluded that accelerating a stock collapse would cause more harm than good.” Court after court has found that a prudent fiduciary could—and likely would—determine that any action he or she could take in these cases would harm participants more than do them good.

Furthermore, what if the price later rebounds and the participants miss the gains? The fiduciary would again be blamed. As the Supreme Court noted in Dudenhoeffer, this puts a fiduciary “between a rock and a hard place.” It’s always easier to see after the fact what would have been the best course of action. For these reasons, courts have been loath to find that the only reasonable fiduciary action would be to take one of the steps the participants claim was required.

Note that a company’s decision to make contributions in employer stock is not a fiduciary action, according to the few courts that have considered this issue. Employers can make contributions in cash or stock as they see fit, as long as the plan provides for it. The question for fiduciaries is what to do with that stock once it’s contributed.

In addition, the Supreme Court in Dudenhoeffer held that a fiduciary’s ERISA duties cannot compel him or her to take action that would be inconsistent with federal securities laws. A fiduciary therefore cannot be required to make decisions based on inside information.What is still being litigated, however, is whether ERISA may require a fiduciary to take an action that is not required by securities laws but not otherwise inconsistent with them, either.

Dudenhoeffer has made it difficult for plaintiffs to plead fiduciary breach in cases for plans with publicly traded company stock. At the same time, investing in any single stock is inherently risky; participants overweighted in company stock could sustain crushing losses if the price plummets, and possibly lose their jobs as well. Enron and Lehman Brothers are both cautionary examples. Fiduciaries can take steps to enhance participant success and reduce fiduciary risk by implementing a sound program design and a prudent monitoring process, complying with the special ERISA Section 404(c) rules applicable to employer stock, maintaining careful, thorough records, and communicating well.

TO THAT LAST POINT: Clearly communicating the risks of overinvesting in the company stock fund is critical. Even if the responsibility for communication generally falls to administrators, the investment fiduciary should ensure that communication about company stock is frequent and clear—for the protection of employee and fiduciary alike.

Mary Jo Larson is a partner at Warner Norcross + Judd LLP, where she puts her 35 years of benefits experience to work on her clients’ 401(k)s, pension plans, nonqualified deferred compensation plans, and executive compensation. She also advises fiduciaries responsible for the investment of plan assets. Larson is a fellow of the American College of Employee Benefits Counsel (ACEBC) and has been a member of the organization since 2005.

Related Articles

Phoning It In

by Alyson M. St. Pierre, Ashley C. Pack and Crystal S. Wildeman

It’s not easy for employers to weigh requests from employees to work from afar, even in the wake of the pandemic. Considerations include COVID-19, vaccinations, the Americans with Disabilities Act and the nature of the job itself.

Employer Considerations for Teleworking

Compelled to Compete

by Ashish Mahendru

Courts and legislatures—and now the White House—are taking an increasingly dim view of noncompete employment agreements, a development the pandemic has quickened. What can employers do to protect their confidential information?

Protection for Employers Beyond Noncompetes

Paid Leave

by Best Lawyers

Eight attorneys from across the country weigh in.

Paid Leave


by Joanna Barsh, Lauren Brown, and Kayvan Kian

Burden, blessing, or both?


Look for the Zoom Label

by Anne R. Yuengert and Matthew C. Lonergan

Will the virtual platforms that got such a boost during the pandemic replace how you interact with your employees, unions, and lawyers?

Virtual Platforms Replacing Work Interactions

Discovery in the Time of COVID-19

by H. Barber Boone

The pandemic has affected the vital process of legal discovery in ways both good and bad. Which changes are likely to become widely accepted in the years ahead?

The Impact of COVID-19 on E-Discovery

Busting a Trust

by Joseph Marrs

The rules governing trusts and asset distribution are often much more flexible than many might assume. Here’s a primer.

Rules Governing Trusts and Asset Distribution

The Next Chapter

by Patrick M. Shelby

Among its uncountable other disruptions, the pandemic upended U.S. bankruptcy procedures. Congressional relief, legislative changes, amended legal provisions: What lies ahead for those looking to file?

COVID-19's Impacts on Bankruptcy Procedures

Meeting Halfway

by Julia B. Meister

To resolve family and business disputes including wills, trusts, estates and more, mediation is often a more effective, gentler and cheaper option than litigation.

Mediation to Resolve Wills, Trusts, Estates

Can Employers Legally Require Their Employees to Get a COVID-19 Vaccine?

by Candace E. Johnson

With the COVID-19 vaccine more widely available now, many employers are asking if they can require employees to receive the vaccine and what risks are involved in doing so.

Can Employers Legally Require Vaccines?

Evolving Marijuana Laws and the Workplace

by Tess P. Anglin

How can employers enforce statutes that differ from state to state?

Red image of a marijuana leaf

Employers Must Soon Use Yet Another New I-9 Form

by Fisher Phillips

New document could be liability trap for unsuspecting employers.

Begin Using the New Form Now

Protecting Small Business Owners: Trial Experts Connick Law LLC Notoriously Successful with Fire Litigation

by Justin Smulison

When small business owners become the target of insurance companies in fire-related lawsuits, hiring a firm with a reputation for understanding the science of fire suppression trials can save their livelihoods.

Gold Indoor Sprinkler Heads on Red Background

Will Recent Boeing Settlements Create Tailwinds In Corporate Law?

by Justin Smulison

Prominent litigation against Boeing is setting a precedent of accountability, professionalism and commitment among company boards as well as ushering ESG further into the courtroom to help monitor and prevent safety issues.

Recent Boeing Settlements and Corporate Law

Colorado's Best Lawyers 2022

by Best Lawyers

Our 2022 Colorado's Best Lawyers publication features top-ranked legal talent in Boulder, Denver and Western Colorado.

Colorado's Best Lawyers 2022

Newly Launched COVID-19 Litigation Project Offers Open Access To Pandemic-Related Court Judgments From Over 70 Countries

by Sara Collin

A worldwide database of COVID-19 cases is uniting more than 70 countries as judges, lawmakers and lawyers continue to navigate pandemic related litigation and the ways in which it’s evolving amid year three.

COVID-19 Worldwide Litigation Project

Trending Articles

Best Lawyers: Ones to Watch in America for 2023

by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

The Best Lawyers in New Zealand™ 2024 Awards

by Best Lawyers

The Best Lawyers in New Zealand 2024 awards include an elite field of top lawyers and law firms.

Auckland, New Zealand Skyline at twilight

Presenting The Best Lawyers in Singapore™ 2024

by Best Lawyers

Best Lawyers offers the most prestigious awards for lawyers and law firms in Singapore for 2024.

Singapore skyline at night

Announcing the 2023 The Best Lawyers in America Honorees

by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

The Best Lawyers in Australia™ 2024 Launch

by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Announcing The Best Lawyers in Japan™ 2024

by Best Lawyers

We are proud to present the 2024 edition of Best Lawyers awards for Japan which include the top lawyers and law firms in the country.

Mt. Fuji in the background with fall leaves and structure in front


Salvi & Maher, LLP: Illinois and Wisconsin's Personal Injury Firm

by Justin Smulison

For more than 35 years, Salvi & Maher LLP has defended their clients throughout Illinois and Wisconsin in various areas of personal injury law, including medical malpractice, motor vehicle accidents, premises liability and trucking litigation.

Skyline of Chicago with green river and blue background


Athea Trial Lawyers

by Justin Smulison

Athea Trial Lawyers is a nationally recognized firm who has received record-breaking victories throughout the country on behalf of personal injury victims.

women with shades of blue in mass arrangement


Rash Mueller Knows What it Means to Help

by Jeffrey Beasley

David Rash of Rash Mueller draws from first-hand experience on the affects of tragic personal injury and loss. His Florida law firm has spent years dedicated to helping the injured find justice.

Doctor with scope reviewing brain scan on screen

The Best Lawyers in South Africa™ 2023

by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag


Mastering the Art of Trial Practice

by John Fields

With its billion-dollar track record, Morelli Law Firm has earned a reputation as one of the country's most successful trial firms.

Morelli and team at table in office with windows

Announcing The Best Lawyers in Germany™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Germany.

Black, red and yellow stripes

Choosing a Title Company: What a Seller Should Expect

by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

Famous Songs Unprotected by Copyright Could Mean Royalties for Some

by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

The Role of a Lawyer in the Slip-and-Fall Settlement Process

by Best Lawyers

Let’s examine the role of a lawyer in the slip-and-fall settlement process and how they can help you achieve a fair and just outcome for your case.

Unseen man with wrap on wrist sits across from woman in suit


Paulson & Nace, PLLC: A Pioneer in Personal Injury Law

by Best Lawyers

Since its inception more than 40 years ago, Paulson & Nace, PLLC, a Washington D.C., Maryland and West Virginia-based personal injury firm, has always led with compassion first. Here are some key insights from the firm on how to go about filing a personal injury claim.

Group of lawyers meet around a conference table