In a recent decision involving fiduciary duties in Employee Stock Ownership Plans (ESOPs), the Supreme Court emphasized an important limit on the pre-eminence of the plan document. Recent Supreme Court decisions, primarily in the welfare benefit plan context, have emphasized the primary importance of the plan document in establishing a fiduciary’s obligations and a participant’s rights.

As the Court most recently reiterated in Heimeshoff v. Hartford Life & Acc. Ins. Co., 134 S. Ct. 604 (2013):

“The plan, in short, is at the center of ERISA.” US Airways, Inc. v. McCutchen, 569 U.S. ––––, ––––, 133 S.Ct. 1537, 1548, 185 L.Ed.2d 654 (2013). “[E]mployers have large leeway to design disability and other welfare plans as they see fit.” Black & Decker Disability Plan v. Nord, 538 U.S. 822, 833, 123 S.Ct. 1965, 155 L.Ed.2d 1034 (2003). And once a plan is established, the administrator’s duty is to see that the plan is “maintained pursuant to [that] written instrument.” 29 U.S.C. § 1102(a)(1).

But the most-recent ERISA decision from the Court, Fifth Third Bancorp v. Dudenhoeffer, (June 25, 2014), noted limits on that leeway, at least as applied to pension plans.

Dudenhoeffer considered the legitimacy of what is typically called the Moench presumption, which a number of Circuit Courts have applied to ESOPs. Fiduciaries of pension plans have a duty of prudence, including the duty to diversify investments to minimize risk of loss. 29 U.S.C. § 1104(a). ESOPs, which are designed to buy and hold stock of the employer that established the plan, receive a statutory exception to this general duty, which provides that “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).

The Moench presumption, named after Moench v. Robertson, 62 F. 3d 553, 571 (3d Cir. 1995), created a “presumption of prudence” for ESOPs, and specifically provided that a fiduciary of an ESOP is entitled to a presumption that the investment in employer stock was prudent. Overcoming the presumption typically required a showing that  something catastrophic was happening to the employer, such as an imminent bankruptcy. Though there are various justifications for the presumption, an important one is that the ESOP plan document encourages or requires the fiduciary to invest in employer stock, and the fiduciary should not be charged with violating its fiduciary duty if it obeys the plan document.

Dudenhoeffer soundly rejected the Moench presumption as being inconsistent with ERISA. In one respect, the decision is a typical example of the Supreme Court’s close reading of the language of the statute, and enforcing what it determines to be the clear requirements of ERISA. In that vein, the Court held that there is nothing in ERISA to expand the protection of ESOP fiduciaries beyond the relaxation of the duty to diversify, making it improper to add a judicially created presumption of prudence. Much has been and will continue to be written about the significance of Dudenhoeffer in the management and continued vitality of ESOPs. We’ll leave that analysis to others.

But the Court also discussed ERISA’s limits on the pre-eminence of the plan, in rejecting the fiduciary’s argument that the duty of prudence must conform to the plan document’s requirement that the fiduciary invest in employer stock. As the Court framed the argument, it was whether a “non-pecuniary goal” in an ERISA plan (here, the goal of promoting employee ownership of employer stock) can trump ERISA’s statutory duty of prudence, designed to protect the retirement assets of employees. The Court held that non-pecuniary goals in a plan did not limit the duty of prudence.  It went on to explain:

Consider the statute’s requirement that fiduciaries act “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.” §1104(a)(1)(D) (emphasis added). This provision makes clear that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand 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 documents, since in that case the duty of prudence could never conflict with a plan document.

The Court also noted that, though a common-law trust document could reduce or waive the prudent person standard, an ERISA plan cannot excuse trustees from their duties under ERISA.

This is not new ground, in the sense that the requirement that a plan must conform to ERISA is not new. But it is a useful reminder that an ERISA plan is only pre-eminent to the extent that it conforms to ERISA’s various limitations and requirements. The “large leeway” afforded to plan sponsors is not unlimited leeway.