We frequently remind our client TPAs, pension plan architects and plan sponsors of the importance of carrying a proper ERISA fidelity bond. Plan participants work hard for their employers and must enjoy the assurance that their contributions are safeguarded. The Fifth Third Bancorp ERISA case is instructive.

In Fifth Third Bancorp v. Dudenhoeffer (2014), the controversy centered on allegations that the fiduciaries of Fifth Third Bancorp’s employee stock ownership plan (ESOP) breached their duties under the Employee Retirement Income Security Act (ERISA) by continuing to invest in the company’s stock despite knowing it was overvalued.

The Verdict and Its Relation to ERISA Fidelity Bond Coverage:

  • The U.S. Supreme Court ruled unanimously that ESOP fiduciaries are not entitled to a special presumption that investments in employer stock are prudent. This decision clarified that ERISA’s duty of prudence applies to all fiduciaries, including those managing ESOPs.
  • The ruling made it easier for plaintiffs to bring claims against fiduciaries for imprudent investment decisions related to employer stock.
  • However, the Supreme Court also set a high pleading standard for plaintiffs, requiring them to allege plausible claims that fiduciaries had material inside information and could have acted differently without violating securities laws.

Did the Verdict Result in a Successful ERISA Bond Claim?

  • The Supreme Court’s ruling did not directly result in a successful claim against an ERISA fidelity bond. Instead, it clarified fiduciary liability under ERISA but sent the case back to lower courts to determine if the plaintiffs’ claims met the new legal standard.
  • ERISA fidelity bonds only cover losses due to fraud or dishonesty, whereas this case primarily focused on fiduciary prudence. While a breach of fiduciary duty could trigger a claim against an ERISA bond, it would require evidence of fraudulent intent or dishonesty rather than mere imprudence.

Impact on ERISA Claims:

  • The case reaffirmed that fiduciaries cannot assume employer stock investments are inherently prudent.
  • It influenced subsequent lawsuits against retirement plan fiduciaries, increasing scrutiny over employer stock investments.
  • Although it did not establish a direct precedent for successful ERISA fidelity bond claims, it provided a legal basis for future claims where fiduciaries act dishonestly in managing employee benefit plans.

While the bonding company skated on this particular controversy, it could have easily gone the other way. ERISA fidelity bonds are required by federal law AND must be issued by an insurer that appears on the U.S. Treasury’s circular (“T-List”) of approved sureties approved for federal obligations. Unless the bonding company appears on this list, the fidelity bond will not bring the plan into compliance. The surety’s rating is also an important consideration. You may learn more about the ERISA fidelity bond on our website at ERISA-Bonds.com.