I am quoted in an excellent article in Pensions & Investments by Robert Steyer on the use of independent fiduciaries when providing employer stock in company retirement plans. As many of you probably know, the Supreme Court’s decision a few years back in Fifth Third Bancorp vs. Dudenhoeffer raised the pleading bar substantially for plaintiffs seeking to recover under ERISA from plan fiduciaries when the value of employer stock drops dramatically due to a downturn in corporate fortunes. Interestingly, when Dudenhoeffer was decided, it wasn’t immediately clear to what extent the decision was good or instead bad for the plaintiffs’ class action bar and, in a mirror image, bad or instead good for plan sponsors. Over time and as fleshed out in further litigation in the lower courts, it became clear that the decision, and the increased pleading standard it adopted for these types of cases, was overwhelmingly good for plan sponsors and simply terrible for plaintiffs.

A recent decision by the Seventh Circuit concerning employer stock held by participants in a Boeing retirement plan gives an excellent overview of the issue and its history. As I noted in the Pensions & Investments article, the decision “almost reads like a law review article” on the subject. The article focuses on one particular aspect of the decision, which is the weight given by the Seventh Circuit to the fact that Boeing delegated decision making authority with regard to that employer stock to an independent fiduciary, who was walled off from the internal dynamics of Boeing and from any potentially relevant inside information that could affect the market price of those stock holdings. The decision, consistent with other case law, makes clear that plan sponsors who use an independent fiduciary in this way effectively insulate themselves from these types of claims.

In my view, the biggest value to using an independent fiduciary in this context is that it dramatically increases the likelihood that a plan fiduciary, sued for the drop in value of employer stock held by employees in a benefit plan, can end the case at the motion to dismiss stage. As I discussed in the article:

The appeals court’s ruling plus the Supreme Court’s Dudenhoeffer decision build an even tougher defense against stock-drop lawsuits, improving the odds that a complaint will be dismissed, he said. “After you get past the dismissal stage, you can spend a fortune in discovery — or you settle,” said Mr. Rosenberg, referring to the data-gathering and data-sharing process that is necessary if a judge rejects a motion to dismiss.

In class action defense, particularly with excessive fee, stock drop or other types of suits against ERISA plan sponsors and fiduciaries, the key is to end the case at the motion to dismiss stage – otherwise, the cost of litigation, combined with the potentially sizable exposure if the plaintiffs prevail at either summary judgment or trial, almost always makes settlement the best option for defendants. As a result, for a defendant, anything that increases the likelihood of ending the case at the motion to dismiss stage is significant and, as the Seventh Circuit has made clear, using an independent fiduciary in a retirement plan dramatically increases that possibility.