Company Stock Issues Potential Litigation Issues and Best Practices when Hiring an Independent Fiduciary
ERISA Provisions ERISA requires fiduciaries to: Act solely in the interest of plan participants and beneficiaries and with the exclusive purpose of providing benefits to them Carry out duties prudently (with the skill, prudence and diligence that a prudent person acting in a similar capacity and familiar with such matters would employ) Diversify plan investments Follow the terms and provisions of plan documents (unless inconsistent with ERISA s requirement to act solely in the interest of plan participants and for the exclusive purpose of providing benefits to them) However, ERISA also provides that the duty to diversify is not violated by the acquisition or holding of company stock.
Company Stock Fund Issues ERISA Section 404(a)(2)-the employer stock fund exception to the duty to diversify Hardwiring of company stock is a permanent plan feature that is written into the terms of the plan. It cannot be removed as an investment option unless the plan is amended by the Board of Directors. Example 401(k) Plan Provision: The ESOP Company Stock Fund may not be revised or terminated, nor may investment in either fund be restricted, suspended or limited in any manner, except by the Board, in its sole discretion, in its settlor capacity pursuant to Section 10.3 hereof However, hardwiring an company stock fund into a 401(k) plan should not mean that a plan fiduciary can ignore the issue of whether company stock should be offered. Remember: a plan fiduciary is responsible for following the terms of the plan document unless doing so is inconsistent with ERISA.
Hardwiring Concept Based on Case Law Kirschbaum v. Reliant Energy (5th Circuit, 2008) Plan document required a company stock fund option. Court held that there is a legal presumption that applicable fiduciaries had met their fiduciary duty by implementing provisions of the plan document which called for a company stock fund option and that such a plan s fiduciary s decision to invest in the employer's securities was prudent. The court held that this presumption may be rebutted only by showing that owing to dire circumstances the terms of the plan requiring investment in company stock should be overridden.
Hardwiring Concept Weakened The U.S. Supreme Court s decision in Fifth Third Bancorp v. Dudenhoeffer (2014) eliminated a long-standing presumption of prudence regarding the offering of company stock as an investment option in 401(k) plans. Prior to Dudenhoeffer, every circuit held fiduciaries were subject to a presumption of prudence. Result: Almost all cases dismissed Dudenhoeffer held that ERISA does not create a special presumption favoring the fiduciaries of plans with company stock funds. The Dudenhoeffer decision announced that, with respect to public company stock, fiduciaries may rely on the stock s market price unless there are special circumstances. Dudenhoeffer also announced that fiduciaries are never required to break securities laws on the basis of inside information.
Company Stock Considerations 1. No changes 2. Establish and document a process for monitoring company stock within the plan similar to review of other investment options under the plan a) This may include periodic monitoring of market price and assessing for any special considerations. 3. Consider limiting plan fiduciaries to employees who are not likely to have regular access to inside information 4. Appoint an independent fiduciary to monitor company stock within the plan 5. Limit the percent of a participant s account that may be invested in company stock 6. Limit the percent of a participant s deferrals that may be invested in company stock 7. Combination of 5 and 6 8. Freeze company stock as an investment option no new money 9. Eliminate company stock as an investment option
Appoint an Independent Fiduciary To help meet its fiduciary responsibilities under ERISA, protect against fiduciary liability and manage fiduciary risk (particularly with respect to access to nonpublic information), an independent investment advisor could be appointed to monitor and evaluate company stock within the plan, as well as other investment options. Duty to monitor the independent investment advisor. The independent investment advisor would be an ERISA fiduciary to the plan. Consider independent fiduciary request for proposal. Spectrum of services offered.
General Scope of Services Oversight of company stock within the plan. Determine whether holding company stock within the plan is no longer consistent with ERISA. Proxy voting if necessary. Spectrum of total discretion to pure oversight responsibilities.
Company Stock Monitoring Considerations In satisfying an ERISA duty to monitor company stock within a 401(k) plan, Plan Sponsors should establish and document a monitoring process parallel to the review of other investment options offered in the plan. This may include the following periodic actions: Reviewing the costs associated with offering company stock within a plan Reviewing participant communications and education materials from a plan recordkeeper on company stock Monitoring company stock usage by participants in the plan Monitoring the investment characteristics of the company stock. These may include, but are not necessarily limited to: The investment performance (both absolute and against a benchmark) of the company stock The performance volatility of the company stock The financial performance of the company Material changes to the company (e.g. a company s CEO is terminated) Reviewing trading and mapping procedures in the event company stock is removed from a plan s investment menu
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 1. Do not develop a stock monitoring process. 2. Develop an internal stock monitoring process. 3. Develop an internal stock monitoring process and seek external non-fiduciary assistance. 4. Appoint an independent non-discretionary fiduciary. 5. Appoint an independent discretionary fiduciary.
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 1. Do not develop a stock monitoring process. Considerations For Plan Fiduciaries - Would not fulfill fiduciary duty under ERISA
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 2. Develop an internal stock monitoring process. Considerations For Plan Fiduciaries - Plan fiduciaries would monitor company stock without the assistance of an external advisor - Would require plan fiduciaries to act prudently when monitoring the company stock - Would not reduce plan fiduciaries' liability and risk
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 3. Develop an internal stock monitoring process and seek external non-fiduciary assistance. Considerations For Plan Fiduciaries - Plan fiduciaries would receive information from an external non-fiduciary advisor to assist in monitoring company stock - Would require plan fiduciaries to act prudently when interpret the information provided by the external advisor when monitoring the company stock - Would not reduce plan fiduciaries' liability and risk
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 4. Appoint an independent non-discretionary fiduciary. Considerations For Plan Fiduciaries - An independent non-discretionary fiduciary would be responsible for monitoring the company stock - Would help plan fiduciaries meet their fiduciary responsibilities under ERISA and reduce fiduciary liability and risk (particularly with respect to access to nonpublic information) - Would require plan fiduciaries to monitor the independent fiduciary ongoing
Company Stock Monitoring Options Plan Sponsors have a number of options to consider when establishing a process to monitor a stock fund within a plan: Stock Monitoring Option 5. Appoint an independent discretionary fiduciary. Considerations For Plan Fiduciaries - An independent discretionary fiduciary would be responsible for monitoring the company stock - The independent discretionary fiduciary would have the authority to remove company stock from a plan - Would assist plan fiduciaries meet their fiduciary responsibilities under ERISA and reduce fiduciary liability and risk (particularly with respect to access to nonpublic information) - Would require plan fiduciaries to monitor the independent fiduciary ongoing
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