Dudenhoeffer Plaintiffs Focus On ERISA’s Duty Of Loyalty In Their Brief To The Supreme Court

The brief of the Respondents — the plaintiffs in the case, John Dudenhoeffer and other participants in the Fifth Third 401(k) plan — takes aim not only at the prudence argument asserted by the Petitioner and its amici discussed in my earlier posts, but also ERISA’s duty of loyalty to plan participants that was allegedly breached.

The brief starts by citing ERISA’s title to “demonstrate the centrality of employee retirement income” to the statutory framework and its protection of employees, not fiduciaries. The Respondent’s brief criticizes the statutory arguments of Fifth Third, with a focus on the plain text of Section 404. For example, the brief criticizes the bank’s prudence argument — that the “like character and with like aims” aspect of Section 404(a)(1)(B) cited by the bank ignores Section 404(a)(2), which only exempts diversification from the duty of prudence when the plan holds employer stock.

But it is the duty of loyalty, Section 404(a)(1)(A), that is the star of this brief — it highlights not only what the plaintiffs say is missing from Fifth Third’s brief, but why a presumption of prudence is unwarranted. As noted by the plaintiffs, the plan’s fiduciaries were Board members and other insiders at Fifth Third; the complaint therefore highlights the allegations of disloyalty by these defendants. The fundamental problem according to the plaintiffs is the conflicted position of these insiders/fiduciaries — “it is the company’s decision to put fiduciary control of the fund in the hands of corporate insiders;” if the plan “were operated by independent fiduciaries, with no conflicting interests, none of these problems would have arisen.” (pp.39-40). This conflict “should subject them to greater scrutiny, not less.” (p.43).

I wondered in an earlier post what path the plaintiffs would choose — the absolute “no prudence” standard set for in the Solicitor’s jurisdictional brief, or the “lesser” version of Moench adopted by the Sixth Circuit that allowed the complaint in Fifth Third to survive dismissal. Respondents’ brief never articulates a specific standard the Court should adopt, but the discussion above suggests that their argument is that no presumption should apply to conflicted, insider fiduciaries. In any event, the brief concludes by asking that the Sixth Circuit’s decision should be affirmed — if special pleading rules should apply, Congress can pass a law like the PSLRA if it “decides to enact” such a law for ERISA plans.

Here’s the link to the brief –

http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs-v3/12-751_resp.pdf

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