Comments on the Supreme Court's Review of the Presumption of Prudence

The Supreme Court has agreed to review the so-called presumption of prudence rule that has provided trustees of ESOPs and other defined contribution plans that are specifically designed to be invested in employer stock protection against lawsuits when stock prices in the plans drop dramatically. The presumption states that fiduciaries are presumed to be prudent in holding or offering employer stock unless there is reason to believe the company's survival is in doubt.

Since 1995, we have found 24 lawsuits that reached court where the presumption of prudence rule was involved and over 100 cases involving 401(k) plans. Notably, not one of the cases involved a closely held company.

The Court's ruling, expected by June, may be on narrow grounds that provide little guidance for future cases or may limit its analysis to public company scenarios. If the Supreme Court does not uphold the presumption, and does so on broad grounds that suggest ESOPs per se are less prudent than other retirement plans, that could have a major impact on ESOPs, public and private, particularly if fiduciaries believe they have to undertake substantially more detailed, time-consuming, and expensive analyses of any ESOP transaction. If it does not uphold the presumption, however, it may do so by laying out guidelines that make these plans viable but within narrower restraints, particularly in public companies.

The above discussion is excerpted from a longer comment on our Web site.