Fifth Third Bancorp v. Dudenhoeffer

(Slip Opinion) OCTOBER TERM, 2013 1

Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is

being done in connection with this case, at the time the opinion is issued.

The syllabus constitutes no part of the opinion of the Court but has been

prepared by the Reporter of Decisions for the convenience of the reader.

See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

FIFTH THIRD BANCORP ET AL. v. DUDENHOEFFER

ET AL.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

No. 12–751. Argued April 2, 2014—Decided June 25, 2014

Petitioner Fifth Third Bancorp maintains a defined-contribution re-

tirement savings plan for its employees. Plan participants may di-

rect their contributions into any of a number of investment options,

including an “employee stock ownership plan” (ESOP), which invests

its funds primarily in Fifth Third stock. Respondents, former Fifth

Third employees and ESOP participants, filed this lawsuit against

petitioners, Fifth Third and several of its officers who are alleged to

be fiduciaries of the ESOP. The complaint alleges that petitioners

breached the fiduciary duty of prudence imposed by the Employee

Retirement Income Security Act of 1974 (ERISA), 29 U. S. C.

§1104(a)(1)(B). Specifically, the complaint alleges that petitioners

should have known—on the basis of both publicly available infor-

mation and inside information available to petitioners because they

were Fifth Third officers—that Fifth Third stock was overpriced and

excessively risky. It further alleges that a prudent fiduciary in peti-

tioners’ position would have responded to this information by selling

off the ESOP’s holdings of Fifth Third stock, refraining from purchas-

ing more Fifth Third stock, or disclosing the negative inside infor-

mation so that the market could correct the stock’s price downward.

According to the complaint, petitioners did none of these things, and

the price of Fifth Third stock ultimately fell, reducing respondents’

retirement savings. The District Court dismissed the complaint for

failure to state a claim, but the Sixth Circuit reversed. It concluded

that ESOP fiduciaries are entitled to a “presumption of prudence”

that does not apply to other ERISA fiduciaries but that the presump-

tion is an evidentiary one and therefore does not apply at the plead-

ing stage. The court went on to hold that the complaint stated a

2 FIFTH THIRD BANCORP v. DUDENHOEFFER

Syllabus

claim for breach of fiduciary duty.

Held:

1. ESOP fiduciaries are not entitled to any special presumption of

prudence. Rather, they are subject to the same duty of prudence that

applies to ERISA fiduciaries in general, §1104(a)(1)(B), except that

they need not diversify the fund’s assets, §1104(a)(2). This conclusion

follows from the relevant provisions of ERISA. Section 1104(a)(1)(B)

“imposes a ‘prudent person’ standard by which to measure fiduciar-

ies’ investment decisions and disposition of assets.” Massachusetts

Mut. Life Ins. Co. v. Russell, 473 U. S. 134, 143, n. 10. Section

1104(a)(1)(C) requires ERISA fiduciaries to diversify plan assets.

And §1104(a)(2) establishes the extent to which those duties are loos-

ened in the ESOP context by providing that “the diversification re-

quirement of [§1104(a)(1)(C)] and the prudence requirement (only to

the extent that it requires diversification) of [§1104(a)(1)(B)] [are] not

violated by acquisition or holding of [employer stock].” Section

1104(a)(2) makes no reference to a special “presumption” in favor of

ESOP fiduciaries and does not require plaintiffs to allege that the

employer was, e.g., on the “brink of collapse.” It simply modifies the

duties imposed by §1104(a)(1) in a precisely delineated way. Thus,

aside from the fact that ESOP fiduciaries are not liable for losses that

result from a failure to diversify, they are subject to the duty of pru-

dence like other ERISA fiduciaries. Pp. 4–15.

2. On remand, the Sixth Circuit should reconsider whether the

complaint states a claim by applying the pleading standard as dis-

cussed in Ashcroft v. Iqbal, 556 U. S. 662, 677–680, and Bell Atlantic

Corp. v. Twombly, 550 U. S. 544, 554–563, in light of the following

considerations. Pp. 15–20.

(a) Where a stock is publicly traded, allegations that a fiduciary

should have recognized on the basis of publicly available information

that the market was overvaluing or undervaluing the stock are gen-

erally implausible and thus insufficient to state a claim under

Twombly and Iqbal. Pp. 16–18.

(b) To state a claim for breach of the duty of prudence, a com-

plaint must plausibly allege an alternative action that the defendant

could have taken, that would have been legal, and that a prudent fi-

duciary in the same circumstances would not have viewed as more

likely to harm the fund than to help it. Where the complaint alleges

that a fiduciary was imprudent in failing to act on the basis of inside

information, the analysis is informed by the following points. First,

ERISA’s duty of prudence never requires a fiduciary to break the law,

and so a fiduciary cannot be imprudent for failing to buy or sell stock

in violation of the insider trading laws. Second, where a complaint

faults fiduciaries for failing to decide, based on negative inside infor-

Cite as: 573 U. S. ____ (2014) 3

Syllabus

mation, to refrain from making additional stock purchases or for fail-

ing to publicly disclose that information so that the stock would no

longer be overvalued, courts should consider the extent to which im-

posing an ERISA-based obligation either to refrain from making a

planned trade or to disclose inside information to the public could

conflict with the complex insider trading and corporate disclosure re-

quirements set forth by the federal securities laws or with the objec-

tives of those laws. Third, courts confronted with such claims should

consider whether the complaint has plausibly alleged that a prudent

fiduciary in the defendant’s position could not have concluded that

stopping purchases or publicly disclosing negative information would

do more harm than good to the fund by causing a drop in the stock

price and a concomitant drop in the value of the stock already held by

the fund. Pp. 18–20.

692 F. 3d 410, vacated and remanded.

BREYER, J., delivered the opinion for a unanimous Court.

Cite as: 573 U. S. ____ (2014) 1

Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in the

preliminary print of the United States Reports. Readers are requested to

notify the Reporter of Decisions, Supreme Court of the United States, Wash-

ington, D. C. 20543, of any typographical or other formal errors, in order

that corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES

_________________

No. 12–751

_________________

FIFTH THIRD BANCORP ET AL., PETITIONERS v.

JOHN DUDENHOEFFER ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SIXTH CIRCUIT

[June 25, 2014]

JUSTICE BREYER delivered the opinion of the Court.

The Employee Retirement Income Security Act of 1974

(ERISA), 88 Stat. 829, as amended, 29 U. S. C. §1001 et

seq., requires the fiduciary of a pension plan to act pru-

dently in managing the plan’s assets. §1104(a)(1)(B). This

case focuses upon that duty of prudence as applied to the

fiduciary of an “employee stock ownership plan” (ESOP), a

type of pension plan that invests primarily in the stock of

the company that employs the plan participants.

We consider whether, when an ESOP fiduciary’s deci-

sion to buy or hold the employer’s stock is challenged in

court, the fiduciary is entitled to a defense-friendly stand-

ard that the lower courts have called a “presumption of

prudence.” The Courts of Appeals that have considered

the question have held that such a presumption does

apply, with the presumption generally defined as a re-

quirement that the plaintiff make a showing that would

not be required in an ordinary duty-of-prudence case, such

as that the employer was on the brink of collapse.

We hold that no such presumption applies. Instead,

ESOP fiduciaries are subject to the same duty of prudence

2 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

that applies to ERISA fiduciaries in general, except that

they need not diversify the fund’s assets. §1104(a)(2).

I

Petitioner Fifth Third Bancorp, a large financial ser-

vices firm, maintains for its employees a defined-

contribution retirement savings plan. Employees may

choose to contribute a portion of their compensation to the

Plan as retirement savings, and Fifth Third provides

matching contributions of up to 4% of an employee’s com-

pensation. The Plan’s assets are invested in 20 separate

funds, including mutual funds and an ESOP. Plan partic-

ipants can allocate their contributions among the funds

however they like; Fifth Third’s matching contributions,

on the other hand, are always invested initially in the

ESOP, though the participant can then choose to move

them to another fund. The Plan requires the ESOP’s

funds to be “invested primarily in shares of common stock

of Fifth Third.” App. 350.

Respondents, who are former Fifth Third employees and

ESOP participants, filed this putative class action in

Federal District Court in Ohio. They claim that petition-

ers, Fifth Third and various Fifth Third officers, were

fiduciaries of the Plan and violated the duties of loyalty

and prudence imposed by ERISA. See §§1109(a),

1132(a)(2). We limit our review to the duty-of-prudence

claims.

The complaint alleges that by July 2007, the fiduciaries

knew or should have known that Fifth Third’s stock was

overvalued and excessively risky for two separate reasons.

First, publicly available information such as newspaper

articles provided early warning signs that subprime lend-

ing, which formed a large part of Fifth Third’s business,

would soon leave creditors high and dry as the housing

market collapsed and subprime borrowers became unable

to pay off their mortgages. Second, nonpublic information

Cite as: 573 U. S. ____ (2014) 3

Opinion of the Court

(which petitioners knew because they were Fifth Third

insiders) indicated that Fifth Third officers had deceived

the market by making material misstatements about the

company’s financial prospects. Those misstatements led

the market to overvalue Fifth Third stock—the ESOP’s

primary investment—and so petitioners, using the partic-

ipants’ money, were consequently paying more for that

stock than it was worth.

The complaint further alleges that a prudent fiduciary

in petitioners’ position would have responded to this in-

formation in one or more of the following ways: (1) by

selling the ESOP’s holdings of Fifth Third stock before the

value of those holdings declined, (2) by refraining from

purchasing any more Fifth Third stock, (3) by canceling

the Plan’s ESOP option, and (4) by disclosing the inside

information so that the market would adjust its valuation

of Fifth Third stock downward and the ESOP would no

longer be overpaying for it.

Rather than follow any of these courses of action, peti-

tioners continued to hold and buy Fifth Third stock. Then

the market crashed, and Fifth Third’s stock price fell by

74% between July 2007 and September 2009, when the

complaint was filed. Since the ESOP’s funds were invested

primarily in Fifth Third stock, this fall in price elimi-

nated a large part of the retirement savings that the

participants had invested in the ESOP. (The stock has

since made a partial recovery to around half of its July

2007 price.)

The District Court dismissed the complaint for failure to

state a claim. 757 F. Supp. 2d 753 (SD Ohio 2010). The

court began from the premise that where a lawsuit chal-

lenges ESOP fiduciaries’ investment decisions, “the plan

fiduciaries start with a presumption that their ‘decision to

remain invested in employer securities was reasonable.’ ”

Id., at 758 (quoting Kuper v. Iovenko, 66 F. 3d 1447, 1459

(CA6 1995)). The court next held that this rule is applica-

4 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

ble at the pleading stage and then concluded that the

complaint’s allegations were insufficient to overcome it.

757 F. Supp. 2d, at 758–759, 760–762.

The Court of Appeals for the Sixth Circuit reversed. 692

F. 3d 410 (2012). Although it agreed that ESOP fiduciar-

ies are entitled to a presumption of prudence, it took the

view that the presumption is evidentiary only and there-

fore does not apply at the pleading stage. Id., at 418–419.

Thus, the Sixth Circuit simply asked whether the allega-

tions in the complaint were sufficient to state a claim for

breach of fiduciary duty. Id., at 419. It held that they

were. Id., at 419–420.

In light of differences among the Courts of Appeals as to

the nature of the presumption of prudence applicable to

ESOP fiduciaries, we granted the fiduciaries’ petition for

certiorari. Compare In re Citigroup ERISA Litigation, 662

F. 3d 128, 139–140 (CA2 2011) (presumption of prudence

applies at the pleading stage and requires the plaintiff to

establish that the employer was “in a ‘dire situation’ that

was objectively unforeseeable by the settlor” (quoting

Edgar v. Avaya, Inc., 503 F. 3d 340, 348 (CA3 2007))), with

Pfeil v. State Street Bank & Trust Co., 671 F. 3d 585, 592–

596 (CA6 2012) (presumption of prudence applies only at

summary judgment and beyond and only requires the

plaintiff to establish that “ ‘a prudent fiduciary acting

under similar circumstances would have made a different

investment decision’ ” (quoting Kuper, supra, at 1459)).

II

A

In applying a “presumption of prudence” that favors

ESOP fiduciaries’ purchasing or holding of employer stock,

the lower courts have sought to reconcile congressional

directives that are in some tension with each other. On

the one hand, ERISA itself subjects pension plan fiduciar-

ies to a duty of prudence. In a section titled “Fiduciary

Cite as: 573 U. S. ____ (2014) 5

Opinion of the Court

duties,” it says:

“(a) Prudent man standard of care

“(1) Subject to sections 1103(c) and (d), 1342, and

1344 of this title, a fiduciary shall discharge his duties

with respect to a plan solely in the interest of the par-

ticipants and beneficiaries and—

“(A) for the exclusive purpose of:

“(i) providing benefits to participants and their ben-

eficiaries; and

“(ii) defraying reasonable expenses of administering

the plan;

“(B) with the care, skill, prudence, and diligence

under the circumstances then prevailing that a pru-

dent man acting in a like capacity and familiar with

such matters would use in the conduct of an enter-

prise of a like character and with like aims;

“(C) by diversifying the investments of the plan so

as to minimize the risk of large losses, unless under

the circumstances it is clearly prudent not to do so;

and

“(D) in accordance with the documents and instru-

ments governing the plan insofar as such documents

and instruments are consistent with the provisions of

this subchapter and subchapter III of this chapter.”

§1104.

See also Central States, Southeast & Southwest Areas

Pension Fund v. Central Transport, Inc., 472 U. S. 559,

570 (1985) (Section 1104(a)(1) imposes “strict standards of

trustee conduct . . . derived from the common law of

trusts—most prominently, a standard of loyalty and a

standard of care”).

On the other hand, Congress recognizes that ESOPs are

“designed to invest primarily in” the stock of the partici-

pants’ employer, §1107(d)(6)(A), meaning that they are not

prudently diversified. And it has written into law its

6 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

“interest in encouraging” their use. One statutory provi-

sion says:

“INTENT OF CONGRESS CONCERNING EMPLOYEE

STOCK OWNERSHIP PLANS.—The Congress, in a series

of laws [including ERISA] has made clear its interest

in encouraging [ESOPs] as a bold and innovative

method of strengthening the free private enterprise

system which will solve the dual problems of securing

capital funds for necessary capital growth and of

bringing about stock ownership by all corporate em-

ployees. The Congress is deeply concerned that the

objectives sought by this series of laws will be made

unattainable by regulations and rulings which treat

[ESOPs] as conventional retirement plans, which re-

duce the freedom of the employee trusts and employ-

ers to take the necessary steps to implement the

plans, and which otherwise block the establishment

and success of these plans.” Tax Reform Act of 1976,

§803(h), 90 Stat. 1590.

In addition, and in keeping with this statement of in-

tent, Congress has given ESOP fiduciaries a statutory

exemption from some of the duties imposed on ERISA

fiduciaries. ERISA specifically provides that, in the case

of ESOPs and other eligible individual account plans,

“the diversification requirement of [§1104(a)(1)(C)]

and the prudence requirement (only to the extent that

it requires diversification) of [§1104(a)(1)(B)] [are] not

violated by acquisition or holding of [employer stock].”

§1104(a)(2).

Thus, an ESOP fiduciary is not obliged under

§1104(a)(1)(C) to “diversif[y] the investments of the plan

so as to minimize the risk of large losses” or under

§1104(a)(1)(B) to act “with the care, skill, prudence, and

diligence” of a “prudent man” insofar as that duty “re-

Cite as: 573 U. S. ____ (2014) 7

Opinion of the Court

quires diversification.”

B

Several Courts of Appeals have gone beyond ERISA’s

express provision that ESOP fiduciaries need not diversify

by giving ESOP fiduciaries a “presumption of prudence”

when their decisions to hold or buy employer stock are

challenged as imprudent. Thus, the Third Circuit has

held that “an ESOP fiduciary who invests the [ESOP’s]

assets in employer stock is entitled to a presumption that

it acted consistently with ERISA” in doing so. Moench v.

Robertson, 62 F. 3d 553, 571 (1995). The Ninth Circuit

has said that to “overcome the presumption of prudent

investment, plaintiffs must . . . make allegations that

clearly implicate the company’s viability as an ongoing

concern or show a precipitous decline in the employer’s

stock . . . combined with evidence that the company is on

the brink of collapse or is undergoing serious mismanage-

ment.” Quan v. Computer Sciences Corp., 623 F. 3d 870,

882 (2010) (brackets and internal quotation marks omit-

ted). And the Seventh Circuit has described the presump-

tion as requiring plaintiffs to “allege and ultimately prove

that the company faced ‘impending collapse’ or ‘dire cir-

cumstances’ that could not have been foreseen by the

founder of the plan.” White v. Marshall & Ilsley Corp., 714

F. 3d 980, 989 (2013).

The Sixth Circuit agreed that some sort of presumption

favoring an ESOP fiduciary’s purchase of employer stock

is appropriate. But it held that this presumption is an

evidentiary rule that does not apply at the pleading stage.

It further held that, to overcome the presumption, a plain-

tiff need not show that the employer was on the “brink of

collapse” or the like. Rather, the plaintiff need only show

that “ ‘a prudent fiduciary acting under similar circum-

stances would have made a different investment deci-

sion.’ ” 692 F. 3d, at 418 (quoting Kuper, 66 F. 3d, at

8 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

1459).

Petitioners argue that the lower courts are right to

apply a presumption of prudence, that it should apply

from the pleading stage onward, and that the presumption

should be strongly in favor of ESOP fiduciaries’ purchas-

ing and holding of employer stock.

In particular, petitioners propose a rule that a challenge

to an ESOP fiduciary’s decision to hold or buy company

stock “cannot prevail unless extraordinary circumstances,

such as a serious threat to the employer’s viability, mean

that continued investment would substantially impair the

purpose of the plan.” Brief for Petitioners 16. In petition-

ers’ view, the “purpose of the plan,” in the case of an

ESOP, is promoting employee ownership of the employer’s

stock over the long term. And, petitioners assert, that

purpose is “substantially impair[ed]”—rendering contin-

ued investment imprudent—only when “a serious threat to

the employer’s viability” makes it likely that the employer

will go out of business. This is because the goal of employee

ownership will be substantially impaired only if the em-

ployer goes out of business, leaving the employees with

no company to own. Id., at 24.

We must decide whether ERISA contains some such

presumption.

III

A

In our view, the law does not create a special presump-

tion favoring ESOP fiduciaries. Rather, the same stand-

ard of prudence applies to all ERISA fiduciaries, including

ESOP fiduciaries, except that an ESOP fiduciary is under

no duty to diversify the ESOP’s holdings. This conclusion

follows from the pertinent provisions of ERISA, which are

set forth above.

Section 1104(a)(1)(B) “imposes a ‘prudent person’ stand-

ard by which to measure fiduciaries’ investment decisions

Cite as: 573 U. S. ____ (2014) 9

Opinion of the Court

and disposition of assets.” Massachusetts Mut. Life Ins.

Co. v. Russell, 473 U. S. 134, 143, n. 10 (1985). Section

1104(a)(1)(C) requires ERISA fiduciaries to diversify plan

assets. And §1104(a)(2) establishes the extent to which

those duties are loosened in the ESOP context to ensure

that employers are permitted and encouraged to offer

ESOPs. Section 1104(a)(2) makes no reference to a special

“presumption” in favor of ESOP fiduciaries. It does not

require plaintiffs to allege that the employer was on the

“brink of collapse,” under “extraordinary circumstances,”

or the like. Instead, §1104(a)(2) simply modifies the duties

imposed by §1104(a)(1) in a precisely delineated way: It

provides that an ESOP fiduciary is exempt from

§1104(a)(1)(C)’s diversification requirement and also from

§1104(a)(1)(B)’s duty of prudence, but “only to the extent

that it requires diversification.” §1104(a)(2) (emphasis

added).

Thus, ESOP fiduciaries, unlike ERISA fiduciaries gen-

erally, are not liable for losses that result from a failure to

diversify. But aside from that distinction, because ESOP

fiduciaries are ERISA fiduciaries and because

§1104(a)(1)(B)’s duty of prudence applies to all ERISA

fiduciaries, ESOP fiduciaries are subject to the duty of

prudence just as other ERISA fiduciaries are.

B

Petitioners make several arguments to the contrary.

First, petitioners argue that the special purpose of an

ESOP—investing participants’ savings in the stock of

their employer—calls for a presumption that such invest-

ments are prudent. Their argument is as follows: ERISA

defines the duty of prudence in terms of what a prudent

person would do “in the conduct of an enterprise of a like

character and with like aims.” §1104(a)(1)(B). The “char-

acter” and “aims” of an ESOP differ from those of an ordi-

nary retirement investment, such as a diversified mutual

10 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

fund. An ordinary plan seeks (1) to maximize retirement

savings for participants while (2) avoiding excessive risk.

But an ESOP also seeks (3) to promote employee owner-

ship of employer stock. For instance, Fifth Third’s Plan

requires the ESOP’s assets to be “invested primarily in

shares of common stock of Fifth Third.” App. 350. In light

of this additional goal, an ESOP fiduciary’s decision to buy

more shares of employer stock, even if it would be impru-

dent were it viewed solely as an attempt to secure finan-

cial retirement benefits while avoiding excessive risk,

might nonetheless be prudent if understood as an attempt

to promote employee ownership of employer stock, a goal

that Congress views as important. See Tax Reform Act of

1976, §803(h), 90 Stat. 1590. Thus, a claim that an ESOP

fiduciary’s investment in employer stock was imprudent

as a way of securing retirement savings should be viewed

unfavorably because, unless the company was about to go

out of business, that investment was advancing the addi-

tional goal of employee ownership of employer stock.

We cannot accept the claim that underlies this argu-

ment, namely, that the content of ERISA’s duty of pru-

dence varies depending upon the specific nonpecuniary

goal set out in an ERISA plan, such as what petitioners

claim is the nonpecuniary goal here. Taken in context,

§1104(a)(1)(B)’s reference to “an enterprise of a like char-

acter and with like aims” means an enterprise with what

the immediately preceding provision calls the “exclusive

purpose” to be pursued by all ERISA fiduciaries: “provid-

ing benefits to participants and their beneficiaries” while

“defraying reasonable expenses of administering the plan.”

§§1104(a)(1)(A)(i), (ii). Read in the context of ERISA as a

whole, the term “benefits” in the provision just quoted

must be understood to refer to the sort of financial bene-

fits (such as retirement income) that trustees who manage

investments typically seek to secure for the trust’s benefi-

ciaries. Cf. §1002(2)(A) (defining “employee pension bene-

Cite as: 573 U. S. ____ (2014) 11

Opinion of the Court

fit plan” and “pension plan” to mean plans that provide

employees with “retirement income” or other “deferral of

income”). The term does not cover nonpecuniary benefits

like those supposed to arise from employee ownership of

employer stock.

Consider the statute’s requirement that fiduciaries act

“in accordance with the documents and instruments gov-

erning the plan insofar as such documents and instru-

ments are consistent with the provisions of this subchap-

ter.” §1104(a)(1)(D) (emphasis added). This provision

makes clear that the duty of prudence trumps the instruc-

tions of a plan document, such as an instruction to invest

exclusively in employer stock even if financial goals de-

mand the contrary. See also §1110(a) (With irrelevant

exceptions, “any provision in an agreement or instrument

which purports to relieve a fiduciary from responsibility

. . . for any . . . duty under this part shall be void as

against public policy”). This rule would make little sense

if, as petitioners argue, the duty of prudence is defined by

the aims of the particular plan as set out in the plan doc-

uments, since in that case the duty of prudence could

never conflict with a plan document.

Consider also §1104(a)(2), which exempts an ESOP

fiduciary from §1104(a)(1)(B)’s duty of prudence but “only

to the extent that it requires diversification.” What need

would there be for this specific provision were the nature

of §1104(a)(1)(B)’s duty of prudence altered anyway in the

case of an ESOP in light of the ESOP’s aim of promoting

employee ownership of employer stock? Cf. Arlington

Central School Dist. Bd. of Ed. v. Murphy, 548 U. S. 291,

299, n. 1 (2006) (“[I]t is generally presumed that statutes

do not contain surplusage”).

Petitioners are right to point out that Congress, in seek-

ing to permit and promote ESOPs, was pursuing purposes

other than the financial security of plan participants. See,

e.g., Tax Reform Act of 1976, §803(h), 90 Stat. 1590 (Con-

12 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

gress intended ESOPs to help “secur[e] capital funds for

necessary capital growth and . . . brin[g] about stock own-

ership by all corporate employees”). Congress pursued

those purposes by promoting ESOPs with tax incentives.

See 26 U. S. C. §§402(e)(4), 404(k), 1042. And it also

pursued them by exempting ESOPs from ERISA’s diversi-

fication requirement, which otherwise would have pre-

cluded their creation. 29 U. S. C. §1104(a)(2). But we are

not convinced that Congress also sought to promote

ESOPs by further relaxing the duty of prudence as ap-

plied to ESOPs with the sort of presumption proposed by

petitioners.

Second, and relatedly, petitioners contend that the duty

of prudence should be read in light of the rule under the

common law of trusts that “the settlor can reduce or waive

the prudent man standard of care by specific language in

the trust instrument.” G. Bogert & G. Bogert, Law of

Trusts and Trustees §541, p. 172 (rev. 2d ed. 1993); see

also Restatement (Second) of Trusts §174, Comment d

(1957) (“By the terms of the trust the requirement of care

and skill may be relaxed or modified”). The argument is

that, by commanding the ESOP fiduciary to invest primar-

ily in Fifth Third stock, the plan documents waived the

duty of prudence to the extent that it comes into conflict

with investment in Fifth Third stock—at least unless

“extraordinary circumstances” arise that so threaten the

goal of employee ownership of Fifth Third stock that the

fiduciaries must assume that the settlor would want them

to depart from that goal under the common-law “deviation

doctrine.” See id., §167. This argument fails, however, in

light of this Court’s holding that, by contrast to the rule at

common law, “trust documents cannot excuse trustees

from their duties under ERISA.” Central States, South-

east & Southwest Areas Pension Fund, 472 U. S., at 568;

see also 29 U. S. C. §§1104(a)(1)(D), 1110(a).

Third, petitioners argue that subjecting ESOP fiduciar-

Cite as: 573 U. S. ____ (2014) 13

Opinion of the Court

ies to a duty of prudence without the protection of a spe-

cial presumption will lead to conflicts with the legal prohi-

bition on insider trading. The potential for conflict arises

because ESOP fiduciaries often are company insiders and

because suits against insider fiduciaries frequently allege,

as the complaint in this case alleges, that the fiduciaries

were imprudent in failing to act on inside information they

had about the value of the employer’s stock.

This concern is a legitimate one. But an ESOP-specific

rule that a fiduciary does not act imprudently in buying or

holding company stock unless the company is on the brink

of collapse (or the like) is an ill-fitting means of addressing

it. While ESOP fiduciaries may be more likely to have

insider information about a company that the fund is

investing in than are other ERISA fiduciaries, the poten-

tial for conflict with the securities laws would be the same

for a non-ESOP fiduciary who had relevant inside infor-

mation about a potential investment. And the potential

for conflict is the same for an ESOP fiduciary whose com-

pany is on the brink of collapse as for a fiduciary who is

invested in a healthier company. (Surely a fiduciary is not

obligated to break the insider trading laws even if his

company is about to fail.) The potential for conflict there-

fore does not persuade us to accept a presumption of the

sort adopted by the lower courts and proposed by petition-

ers. We discuss alternative means of dealing with the

potential for conflict in Part IV, infra.

Finally, petitioners argue that, without some sort of

special presumption, the threat of costly duty-of-prudence

lawsuits will deter companies from offering ESOPs to

their employees, contrary to the stated intent of Congress.

Cf. Massachusetts Mut. Life Ins. Co., 473 U. S., at 148, n.

17 (“Congress was concerned lest the cost of federal stand-

ards discourage the growth of private pension plans”).

ESOP plans instruct their fiduciaries to invest in company

stock, and §1104(a)(1)(D) requires fiduciaries to follow

14 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

plan documents so long as they do not conflict with

ERISA. Thus, in many cases an ESOP fiduciary who fears

that continuing to invest in company stock may be impru-

dent finds himself between a rock and a hard place: If he

keeps investing and the stock goes down he may be sued

for acting imprudently in violation of §1104(a)(1)(B), but

if he stops investing and the stock goes up he may be

sued for disobeying the plan documents in violation of

§1104(a)(1)(D). See, e.g., White, 714 F. 3d, at 987

(“[F]iduciaries could be liable either for the company

stock’s poor performance if they continue to invest in

employer stock, or for missing the opportunity to benefit

from good performance if they do not. . . . Such a high

exposure to litigation risks in either direction could dis-

courage employers from offering ESOPs, which are fa-

vored by Congress”); Evans v. Akers, 534 F. 3d 65, 68 (CA1

2008) (describing two lawsuits challenging the decisions of

a plan’s fiduciaries with “diametrically opposed theor[ies]

of liability”: one arguing that the fiduciaries acted impru-

dently by continuing to invest in company stock, and the

other contending that they acted imprudently by divesting

“despite the company’s solid potential to emerge from

bankruptcy with substantial value for shareholders”).

Petitioners argue that, given the threat of such expensive

litigation, ESOPs cannot thrive unless their fiduciaries are

granted a defense-friendly presumption.

Petitioners are basically seeking relief from what they

believe are meritless, economically burdensome lawsuits.

We agree that Congress sought to encourage the creation

of ESOPs. And we have recognized that “ERISA repre-

sents a ‘ “careful balancing” between ensuring fair and

prompt enforcement of rights under a plan and the en-

couragement of the creation of such plans.’ ” Conkright v.

Frommert, 559 U. S. 506, 517 (2010) (quoting Aetna

Health Inc. v. Davila, 542 U. S. 200, 215 (2004)); see also

Varity Corp. v. Howe, 516 U. S. 489, 497 (1996) (In “inter-

Cite as: 573 U. S. ____ (2014) 15

Opinion of the Court

pret[ing] ERISA’s fiduciary duties,” “courts may have to

take account of competing congressional purposes, such as

Congress’ desire to offer employees enhanced protection

for their benefits, on the one hand, and, on the other, its

desire not to create a system that is so complex that ad-

ministrative costs, or litigation expenses, unduly discour-

age employers from offering welfare benefit plans in the

first place”).

At the same time, we do not believe that the presump-

tion at issue here is an appropriate way to weed out merit-

less lawsuits or to provide the requisite “balancing.” The

proposed presumption makes it impossible for a plaintiff

to state a duty-of-prudence claim, no matter how meritori-

ous, unless the employer is in very bad economic circum-

stances. Such a rule does not readily divide the plausible

sheep from the meritless goats. That important task can

be better accomplished through careful, context-sensitive

scrutiny of a complaint’s allegations. We consequently

stand by our conclusion that the law does not create a

special presumption of prudence for ESOP fiduciaries.

IV

We consider more fully one important mechanism for

weeding out meritless claims, the motion to dismiss for

failure to state a claim. That mechanism, which gave rise

to the lower court decisions at issue here, requires careful

judicial consideration of whether the complaint states a

claim that the defendant has acted imprudently. See Fed.

Rule Civ. Proc. 12(b)(6); Ashcroft v. Iqbal, 556 U. S. 662,

677–680 (2009); Bell Atlantic Corp. v. Twombly, 550 U. S.

544, 554–563 (2007). Because the content of the duty of

prudence turns on “the circumstances . . . prevailing” at

the time the fiduciary acts, §1104(a)(1)(B), the appropriate

inquiry will necessarily be context specific.

The District Court in this case granted petitioners’

motion to dismiss the complaint because it held that re-

16 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

spondents could not overcome the presumption of pru-

dence. The Court of Appeals, by contrast, concluded that

no presumption applied. And we agree with that conclu-

sion. The Court of Appeals, however, went on to hold that

respondents had stated a plausible duty-of-prudence

claim. 692 F. 3d, at 419–420. The arguments made here,

along with our review of the record, convince us that the

judgment of the Court of Appeals should be vacated and

the case remanded. On remand, the Court of Appeals

should apply the pleading standard as discussed in

Twombly and Iqbal in light of the following considerations.

A

Respondents allege that, as of July 2007, petitioners

knew or should have known in light of publicly available

information, such as newspaper articles, that continuing

to hold and purchase Fifth Third stock was imprudent.

App. 48–53. The complaint alleges, among other things,

that petitioners “continued to allow the Plan’s investment

in Fifth Third Stock even during the time that the stock

price was declining in value as a result of [the] collapse of

the housing market” and that “[a] prudent fiduciary facing

similar circumstances would not have stood idly by as the

Plan’s assets were decimated.” Id., at 53.

In our view, where a stock is publicly traded, allegations

that a fiduciary should have recognized from publicly

available information alone that the market was over- or

undervaluing the stock are implausible as a general rule,

at least in the absence of special circumstances. Many

investors take the view that “ ‘they have little hope of

outperforming the market in the long run based solely on

their analysis of publicly available information,’ ” and

accordingly they “ ‘rely on the security’s market price as an

unbiased assessment of the security’s value in light of all

public information.’ ” Halliburton Co. v. Erica P. John

Fund, Inc. ___ U. S. ___, ___ (2014) (slip op., at 11–12)

Cite as: 573 U. S. ____ (2014) 17

Opinion of the Court

(quoting Amgen Inc. v. Connecticut Retirement Plans and

Trust Funds, 568 U. S. ___, ___ (2013) (slip op., at 5)).

ERISA fiduciaries, who likewise could reasonably see

“little hope of outperforming the market . . . based solely

on their analysis of publicly available information,” ibid.,

may, as a general matter, likewise prudently rely on the

market price.

In other words, a fiduciary usually “is not imprudent to

assume that a major stock market . . . provides the best

estimate of the value of the stocks traded on it that is

available to him.” Summers v. State Street Bank & Trust

Co., 453 F. 3d 404, 408 (CA7 2006); see also White, 714

F. 3d, at 992 (A fiduciary’s “fail[ure] to outsmart a pre-

sumptively efficient market . . . is . . . not a sound basis for

imposing liability”); cf. Quan, 623 F. 3d, at 881 (“Fiduciar-

ies are not expected to predict the future of the company

stock’s performance”).

We do not here consider whether a plaintiff could none-

theless plausibly allege imprudence on the basis of pub-

licly available information by pointing to a special circum-

stance affecting the reliability of the market price as “ ‘an

unbiased assessment of the security’s value in light of all

public information,’ ” Halliburton Co., supra, at ___ (slip

op., at 12) (quoting Amgen Inc., supra, at ___ (slip op., at

5)), that would make reliance on the market’s valuation

imprudent. In this case, the Court of Appeals held that

the complaint stated a claim because respondents “allege

that Fifth Third engaged in lending practices that were

equivalent to participation in the subprime lending mar-

ket, that Defendants were aware of the risks of such in-

vestments by the start of the class period, and that such

risks made Fifth Third stock an imprudent investment.”

692 F. 3d, at 419–420. The Court of Appeals did not point

to any special circumstance rendering reliance on the

market price imprudent. The court’s decision to deny

dismissal therefore appears to have been based on an

18 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

erroneous understanding of the prudence of relying on

market prices.

B

Respondents also claim that petitioners behaved impru-

dently by failing to act on the basis of nonpublic infor-

mation that was available to them because they were Fifth

Third insiders. In particular, the complaint alleges that

petitioners had inside information indicating that the

market was overvaluing Fifth Third stock and that they

could have used this information to prevent losses to the

fund by (1) selling the ESOP’s holdings of Fifth Third

stock; (2) refraining from future stock purchases (includ-

ing by removing the Plan’s ESOP option altogether); or (3)

publicly disclosing the inside information so that the

market would correct the stock price downward, with the

result that the ESOP could continue to buy Fifth Third

stock without paying an inflated price for it. See App. 17,

88–89, 113.

To state a claim for breach of the duty of prudence on

the basis of inside information, a plaintiff must plausibly

allege an alternative action that the defendant could have

taken that would have been consistent with the securities

laws and that a prudent fiduciary in the same circum-

stances would not have viewed as more likely to harm the

fund than to help it. The following three points inform the

requisite analysis.

First, in deciding whether the complaint states a claim

upon which relief can be granted, courts must bear in

mind that the duty of prudence, under ERISA as under

the common law of trusts, does not require a fiduciary to

break the law. Cf. Restatement (Second) of Trusts §166,

Comment a (“The trustee is not under a duty to the bene-

ficiary to do an act which is criminal or tortious”). Federal

securities laws “are violated when a corporate insider

trades in the securities of his corporation on the basis of

Cite as: 573 U. S. ____ (2014) 19

Opinion of the Court

material, nonpublic information.” United States v.

O’Hagan, 521 U. S. 642, 651–652 (1997). As every Court

of Appeals to address the question has held, ERISA’s duty

of prudence cannot require an ESOP fiduciary to perform

an action—such as divesting the fund’s holdings of the

employer’s stock on the basis of inside information—that

would violate the securities laws. See, e.g., Rinehart v.

Akers, 722 F. 3d 137, 146–147 (CA2 2013); Kirschbaum v.

Reliant Energy, Inc., 526 F. 3d 243, 256 (CA5 2008); White,

supra, at 992; Quan, supra, at 881–882, and n. 8; Lanfear

v. Home Depot, Inc., 679 F. 3d 1267, 1282 (CA11 2012). To

the extent that the Sixth Circuit denied dismissal based

on the theory that the duty of prudence required petition-

ers to sell the ESOP’s holdings of Fifth Third stock, its

denial of dismissal was erroneous.

Second, where a complaint faults fiduciaries for failing

to decide, on the basis of the inside information, to refrain

from making additional stock purchases or for failing to

disclose that information to the public so that the stock

would no longer be overvalued, additional considerations

arise. The courts should consider the extent to which an

ERISA-based obligation either to refrain on the basis of

inside information from making a planned trade or to

disclose inside information to the public could conflict with

the complex insider trading and corporate disclosure

requirements imposed by the federal securities laws or

with the objectives of those laws. Cf. 29 U. S. C. §1144(d)

(“Nothing in this subchapter [which includes §1104] shall

be construed to alter, amend, modify, invalidate, impair,

or supersede any law of the United States . . . or any rule

or regulation issued under any such law”); Black & Decker

Disability Plan v. Nord, 538 U. S. 822, 831 (2003)

(“Although Congress ‘expect[ed]’ courts would develop ‘a fed-

eral common law of rights and obligations under ERISA-

regulated plans,’ the scope of permissible judicial innova-

tion is narrower in areas where other federal actors are

20 FIFTH THIRD BANCORP v. DUDENHOEFFER

Opinion of the Court

engaged” (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U. S.

41, 56 (1987); citation omitted)); Varity Corp., 516 U. S., at

506 (reserving the question “whether ERISA fiduciaries

have any fiduciary duty to disclose truthful information on

their own initiative, or in response to employee inquiries”).

The U. S. Securities and Exchange Commission has not

advised us of its views on these matters, and we believe

those views may well be relevant.

Third, lower courts faced with such claims should also

consider whether the complaint has plausibly alleged that

a prudent fiduciary in the defendant’s position could not

have concluded that stopping purchases—which the mar-

ket might take as a sign that insider fiduciaries viewed

the employer’s stock as a bad investment—or publicly

disclosing negative information would do more harm than

good to the fund by causing a drop in the stock price and a

concomitant drop in the value of the stock already held by

the fund.

* * *

We leave it to the courts below to apply the foregoing to

the complaint in this case in the first instance. The judg-

ment of the Court of Appeals for the Sixth Circuit is va-

cated and the case is remanded for further proceedings

consistent with this opinion.

It is so ordered.