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In 2014, the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 573 U.S., 189 L. Ed. 2d 457 (2014) considered whether there is a presumption of prudence for ESOPs that hold company stock. While previously, the “Courts of Appeals that have considered the question have held that such a presumption does apply,” the Supreme Court held “that no such presumption applies.” This ruling potentially raises the risk to ESOP plan decisions to hold company stock, as there could be a higher burden in defending that decision in certain circumstances.

In light of factors including the new guidance from the Supreme Court, administrators of retirement plans for a Fortune 500 company approached NERA to examine issues related to either continuing or discontinuing its company stock fund.

NERA examined two areas relevant to the company’s concerns. First, it examined whether the company stock traded in an “efficient market,” or one in which the fiduciaries should not be able to predict whether the company stock would outperform or underperform the market based on publicly available information.[1] If true, then, as indicated by the Supreme Court in another part of its Fifth Third opinion, fiduciaries not in possession of inside information would not be expected to do either better or worse than the market either by holding or eliminating the company stock fund. NERA’s analyses were based on academic literature and ten types of tests that have been commonly used in litigation related to questions of market efficiency.

Second, NERA examined the historical riskiness of the company stock fund relative to other alternatives in which employees could invest. This was done both on a stand-alone basis (i.e., a comparison of the historical volatility of the company stock fund and other available funds) and by considering potential portfolios that employees could create from the company stock fund and other available funds. The results of these analyses would allow the fiduciaries to understand the potential risks that employees could undertake given different potential choices of investment funds.

NERA provided the fiduciaries with a report detailing its findings on these issues as well as detailed descriptions of its analyses, documenting material that the fiduciaries were able to rely upon in making their decision about how to deal with the company stock fund on a going-forward basis.


1. Here, we are technically referring to semi-strong-form efficiency.