In the past few years, several cases have been filed against ESOP fiduciaries who allegedly invested employer contributions in an ESOP’s other investment account (“OIA”) too conservatively. These cases have begun to produce divergent results at the motion to dismiss stage. For example, the Western District of North Carolina dismissed a challenge to a conservative OIA investment strategy in Trull v. McCreary Modern, Inc., reasoning in part that ERISA’s carveout for ESOP fiduciaries from the duty to diversify plan assets applies to an ESOP’s non-company stock assets—a decision currently on appeal to the Fourth Circuit. The Northern District of California recently came out the other way.
In Dawson-Roberts v. Norman S. Wright Mechanical Equipment LLC, the plaintiff alleged that the ESOP’s OIA had grown from approximately $4 million in 2021 to $12 million in 2024 while invested in cash equivalents, and that the OIA would be worth more today had those assets been invested in a portfolio including stocks and bonds. The court largely denied the defendants’ motion to dismiss.
On standing, the court held that the plaintiff alleged a cognizable injury under a “relative loss” theory—that his account would hold more money today but for the challenged investments—even though his account had gained value in absolute terms. As to the plaintiff’s duty of prudence claim, the court found it plausible that investing in cash equivalents was a “mismatch” between the ESOP’s assets and its long-term purpose. Splitting with Trull, the court rejected the defendants’ reliance on ERISA’s exemption from the duty to diversify plan assets afforded to ESOP fiduciaries, holding instead that the carveout is limited by its terms to company stock.
While the court recognized that there may have been “good reasons” for maintaining a high OIA cash balance (for example, liquidity to facilitate stock repurchases), it declined to give weight to Defendants’ alternative explanations at the pleading stage. This is contrary to Supreme Court precedent instructing courts to consider “obvious alternative explanations” to a plaintiff’s factual allegations at the pleadings stage. The court likewise did not address the “range of reasonable judgments a fiduciary may make based on her experience and expertise,” also as instructed by the Supreme Court. Hughes v. Nw. Univ., 595 U.S. 170, 177 (2022).
The court also found a plausible duty of loyalty claim premised on the allegation that the ESOP’s fiduciaries kept a large cash balance to relieve the company of its obligation to repurchase company stock distributed to departing ESOP participants. It likewise permitted a prohibited transaction claim to proceed based on an alleged 2024 reallocation of OIA assets between cash-equivalent accounts, splitting with the Western District of Pennsylvania’s 2025 decision in Schultz v. Aerotech, Inc. that adhering to the same investment strategy is not an actionable transaction.
Dawson-Roberts reflects a split among district courts considering whether plaintiffs can plausibly state claims in ESOP non-company stock cases. With Trull pending before the Fourth Circuit and decisions landing on both sides, it is possible that we will continue to see litigation over the manner in which ESOP fiduciaries invest non-company stock assets.
