The Sixth Circuit provides the first definitive, court of appeals decision on a recurring issue: is it a fiduciary act, subject to ERISA § 404(a)(1), for a plan fiduciary to incorporate (in this case, allegedly untruthful) SEC filings by reference in a Summary Plan Description, thus potentially misleading participants about the risk of investing retirement money in the employer's stock fund? The Sixth Circuit holds that it is.
Dudenhoefer v. Fifth Third Bancorp, No. 11-3012 (6th Cir. Sept. 5, 2012): As the panel summarizes, the plaintiffs (for themselves and a proposed class) "alleged that plan fiduciaries continued to invest in and hold Fifth Third Stock despite its precipitous decline in value in breach of their fiduciary duties including their duty to prudently and loyally manage the plan's investment in company securities."
According to the complaint, the employer's retirement plan provided various alternative investment vehicles, including a fund entirely devoted to Fifth Third stock, as well as nineteen other funds. The employer also matched contributions 100% up to 4% of the plan participants' compensation, but did so entirely in Fifth Third Stock Fund, which could then be moved to the other investment options. Notwithstanding the apparent flexibility, the plan grew steadily more invested in Fifth Third Stock. The Summary Plan Description (SPD) directed participants to review Fifth Third's filings with the SEC for further information.
During 2007-09, Fifth Third stock took a long dive, losing 74% of its value, so participants that were heavily in Fifth Third stock allegedly took a huge beating. The complaint alleged, among other things, that the plan fiduciaries were imprudent in continuing to offer the Fifth Third Stock Fund as an alternative and that they failed to provide accurate and complete information about the risks in Fifth Third's SEC filings.
The district court dismissed the case at the complaint stage, holding that the Plan fiduciaries - which qualified as an employee stock ownership plan (ESOP) - were accorded a presumption (dubbed the "Kuper presumption") that investment in company stock is reasonable. The district court also held that the SPD's recital of the SEC documents was not a fiduciary act, because the company and its agent were not acting in a fiduciary duty when they drafted the 10-Ks and other such filings.
The Sixth Circuit reverses. It holds that the district court prematurely dismissed the case at the complaint stage, without allowing the plaintiffs an opportunity to conduct discovery.
One legal issue presented in the case was, in fact, resolved by an intervening Sixth Circuit decision, Pfeil v. State Street Bank & Trust Co., 671 F.3d 585, 591 (6th Cir. 2012), which held that the Kuper presumption did not apply to dismissal of a complaint at the pleadings stage - that the presumption was only meaningful at a latter stage of the case, summary judgment, when all of the facts are developed. Because the district court resolved the issue without a factual record, the Sixth Circuit remands the case to the district court.
The second issue, that has not previously been decided in any published appellate ERISA decision, is whether the plan fiduciaries' decision to cite to the (possible misleading) SEC filings in the SPD was a "fiduciary act" subject to ERISA liability. The plan's argument was that because the drafting of SEC filings is not itself conducted in a "fiduciary capacity," for the SPD to merely identify them as a source of information for plan participants is likewise not a fiduciary act. Indeed, "Plaintiffs concede that the preparation, signing, and filing of SEC documents are not fiduciary acts under ERISA."
The Sixth Circuit holds that plan fiduciaries can be held liable for incorporating untruthful government filings into an SPD, as a violation of the duty to provide complete and accurate information about the plan:
"The Amended Complaint plausibly alleges Defendants breached their fiduciary duties by intentionally incorporating Fifth Third's SEC filings into the Plan's SPD and thereby conveying misleading information to Plan participants. ERISA requires the issuance of an SPD, but does not require the incorporation of a company's SEC filings into the SPD. See 29 U.S.C. § 1022. Defendants exercised discretion in choosing to incorporate the filings into the Plan's SPD as a direct source of information for Plan participants about the financial health of Fifth Third and the value of its stock, an investment option in the Plan."
For the time being, then, at least until plan fiduciaries get wise and cease the practice of blindly incorporating SEC filings into SPD, there are probably many plans vulnerable to the same argument, as this not an uncommon practice.