The 5th U.S. Circuit Court of Appeals has upheld the prior decision of the U.S. District Court, rejecting this case filed by Whole Foods 401(k) defined contribution plan participants, claiming that Whole Foods executives breached fiduciary duties by permitting employees’ continued investment in Whole Foods stock, despite its artificially inflated value due to a ‘”widespread overpricing scheme.”’ The plaintiffs failed to provide an alternate action that fiduciaries could have taken that would not be viewed as more harmful to the plan as helpful. Suggested alternate actions included closing or freezing the company stock fund until the stock became a prudent investment, issuance of corrective public disclosures to ‘” cure the underlying fraud”’, or diversion of the company stock fund’s holdings into a “low-cost hedging” product that would behave in a counter-cyclical fashion to Whole Foods stock. The latter option, although novel, was deemed insufficient because it offers no explanation for why the hedging product would not need to be disclosed. A prudent fiduciary would in fact disclose, so as to alert the marketplace of the fraud, which, would in turn, produce more harm than help to the fund.
www.planadviser.com; September 6, 2018.