Several cases have been filed challenging the investment decisions concerning non-company stock assets held in employee stock ownership plans (ESOPs). Specifically, plaintiffs have claimed that these assets—also referred to as Other Investment Accounts, or OIA—should be invested more aggressively in equities, rather than in cash and cash equivalents. Defendants have argued, among other things, that maintaining a conservative hedge against an ESOP’s riskier company stock investment is necessary to ensure an ESOP’s continued sustainability.

In October, the Western District of North Carolina dismissed a challenge to the investment strategy for the OIA assets held in the McCreary Modern, Inc. ESOP. The court in that case, styled Trull v. McCreary Modern, Inc., held that the plaintiff failed to adequately allege that the defendants acted imprudently under ERISA, including because ESOP fiduciaries are exempt from ERISA’s duty to diversify plan assets. The plaintiff appealed the October decision to the Fourth Circuit, making it the first OIA case to reach an appeals court.

The plaintiff’s Fourth Circuit brief, filed on January 5, makes three main arguments:

1. The defendants did not employ a prudent process to establish an investment strategy sufficiently tailored to the ESOP’s participants;
2. ERISA’s exemption from the duty to diversify only applies to an ESOP’s company stock assets, not its OIA assets; and
3. The district court improperly adopted the defendants’ explanations for its actions at the motion to dismiss stage.

The defendants’ response brief is due on February 25, and the plaintiff has requested oral argument in the appeal.

Defendants have filed motions to dismiss in several other pending OIA cases. The Fourth Circuit’s decision in McCreary Modern will create the first circuit-level opinion for other courts to consider when grappling with motions to dismiss these cases.