Another Court Says ESOPs Do Not Have to Diversify, Even If Stock Under Pressure

In Smith v. Delta Airlines, No. 1:04-CV-2592-ODE, (N.D. Ga., 3/31/06), a federal district court ruled that fiduciaries of Delta Airline's ESOP did not have a duty to diversify out of Delta stock even though the company was under great financial pressure. Delta's ESOP was used to fund a match to the company's 401(k) plan. Participants could also invest up to 50% of their deferrals into Delta stock. From 2000 to 2004, when Delta appointed new independent fiduciaries to manage the plan, Delta stock dropped 92%. At that point, the fiduciaries removed company stock from the investment choices. Dennis Smith sued in a putative class action lawsuit, alleging that the fiduciaries should have removed Delta stock from both plans much earlier. The court, however, took a strict view of ESOP rules, saying that fiduciaries only needed to diversify if they knew or should have known the company was facing "imminent collapse."

The conclusion differs from that in other federal cases, most notably Moench v. Robinson, which was decided at the appellate level. It is the same argument, however, that was recently made by the court in McKesson HBOC Inc. ERISA Litigation, No. C-00-20030 RMW (N.D. CA., 9/9/05).