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
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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
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                     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-
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                     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
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                        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-
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                      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
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                     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-
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                      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-
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                      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.