Courts Split Over Whether ERISA Requires Diversification of ESOP Non-Employer Stock Assets

An employee stock ownership plan (ESOP) is a defined contribution pension plan that invests primarily in shares of stock issued by the sponsoring employer. Though fiduciaries of pension benefit plans generally must diversify investments of the plan's assets so as to minimize the risk of large plan losses, ESOPs are not diversified by design. The Employee Retirement Incomes Security Act of 1974 (ERISA) recognizes the unique purpose of ESOPs and provides that the diversification requirement is not violated by an ESOP's acquisition or holding of employer stock. See 29 U.S.C. § 1104(a)(2)).

Several recent federal district court decisions have focused on the scope of the ESOP diversification exemption and reached different conclusions as to whether ESOP fiduciaries can be held liable for failing to diversify the ESOP's non-employer stock assets. These decisions and their implications for ESOP fiduciaries are discussed below.

Schultz v. Aerotech, Inc.

In Schultz, the ESOP participants alleged that the fiduciaries' strategy of investing the ESOP's general investments account (GIA) exclusively in money market funds and short-term certificates of deposit violated their duty of prudence. To support their claim, the participants pointed to the fact that more than $10 million (which represented approximately 20 percent of the ESOP's assets) was conservatively invested. The participants claimed that this was problematic because the average participant was 20 years from retirement. According to the complaint, given the ESOP participants' long investment horizon, they had a high tolerance for short-term market volatility and "need[ed] an investment strategy focused on long-term capital appreciation." The participants claimed that there was "a mismatch" between ESOP fiduciaries' short-term investment strategy and the participants' goal of long-term capital appreciation and that the defendants' failure to tailor the GIA investment strategy to ESOP participants' time horizon and risk tolerance evidenced a breach of the duty of prudence. The participants also identified several alleged comparable ESOPs that had invested their respective GIAs in more diversified and riskier investments to support their allegations of imprudence.

The participants anticipated that the defendants would argue that there was no duty to diversify the GIA and that it was important to ensure the ESOP had sufficient liquid assets to cover the plan's stock repurchase obligation. To that end, the participants alleged that the ESOP repurchased an average of $3.5 million to $4 million per year in stock from departing employees from June 2018 to June 2023, yet maintained a GIA balance between $9 million and $12.2 million during that same time period.

The defendants moved to dismiss the prudence claim and argued that they had successfully managed a mature 50-year-old ESOP, made voluntary yearly contributions, recycled shares and conservatively invested the GIA to ensure sufficient funds for the future. They also pointed to the fact that there are unique considerations that fiduciaries responsible for the administration of an ESOP must take into account when determining the ESOP's investment strategy.

On February 20, 2025, the U.S. District Court for the Western District of Pennsylvania denied the defendants' motion to dismiss the imprudence claim. See 2025 WL 563585 (W.D. Pa. Feb. 20, 2025). In doing so, the court held that the vast disparity between the ESOP's cash holdings and those of comparator plans supported an inference of an imprudent process. The court also found that the participants had plausibly alleged that the defendants unquestioning adherence to the "all cash" philosophy for many years, despite changing external market conditions and internal fluctuations in expected recycling obligations, also supported the participants' imprudence claim.

Trull v. McCreary Modern, Inc.

In Trull, the plaintiff-participant alleged that the ESOP's fiduciaries breached their fiduciary duties by allowing a large cash buffer (which ranged between $8 million and $16 million) to accumulate in the plan without pursuing more aggressive investments. The participant supported his imprudence claims by identifying several alleged "comparator" companies that maintained only a de minimis cash buffer in their ESOPs.

On October 1, 2025, the U.S. District Court for the Western District of North Carolina granted the defendants' motion to dismiss and held that the challenge to the conservative investment of an ESOP's cash buffer was barred by ERISA's statutory diversification exemption. See 2025 WL 2803605 (W.D.N.C. Oct. 1, 2025).

The court held that the exemption from the duty to diversify applies to all of an ESOP's assets, not just employer stock. It reasoned that requiring diversification of a cash buffer needed for liquidity would undermine the purpose of an ESOP and create untenable risks for fiduciaries. The court found support for its reasoning from the U.S. Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), in which the Supreme Court stated that ESOP fiduciaries "need not diversify the fund's assets." The Court emphasized the "rock and a hard place" dilemma it believed a narrower reading would create, where fiduciaries could be sued regardless of their strategy for managing the cash buffer.

Moran v. ESOP Committee of the Aluminum Precision Products, Inc.

Most recently, in Moran, the plaintiff-participant alleged that the ESOP fiduciaries' decision to invest the ESOP's other investments account (OIA), which comprised 20 percent to 25 percent of plan assets exclusively in a money market fund and, later, a short-term U.S. Treasury bond fund, was imprudent for a long-term retirement plan. And like the participants in Moran and Schultz (who are all represented by the same plaintiffs' law firm), the participant pointed to alleged comparator ESOPs that invested their cash assets more aggressively and asserted that there was a "mismatch" between the plan's assets and its purpose as a retirement plan.

The defendant sought dismissal of the imprudence claim and argued, among other things, that ESOPs require liquidity to satisfy repurchase obligations triggered by departing plan participants, and that allowing prudence challenges based on an ESOP's liquidity accounts would undermine ordinary ESOP administration.

The U.S. District Court for the Central District of California denied the defendant's motion for judgment on the pleadings and allowed the claim for breach of the duty of prudence to proceed. See 2026 WL 235573 (C.D. Cal. Jan. 28, 2026). In denying the defendant's motion, the court held that ERISA's diversification exemption for ESOPs is limited to the employer security holding and does not immunize the management of other assets from prudence review. In particular, the court held that the diversification exemption relaxes the duty of prudence only to the extent that it requires diversification with respect to the acquisition or holding of qualified employer stock. The court stated that non‑employer stock holdings, such as the cash in the OIA, are not covered by the diversification exemption. As such, the exemption did not bar a prudence challenge

Conclusion and Considerations

Until there is further clarity from the courts or U.S. Department of Labor, ESOP fiduciaries should not assume that the diversification exemption bars all challenges to the investment of an ESOP's non-employer stock assets. ESOP fiduciaries should reconsider any "all cash" philosophy and understand the ESOP's participant demographics, level of cash and liquidity needs. This information should be taken into account when preparing, documenting and implementing the strategy for investing the ESOP's non-employer stock assets. One option a plan fiduciary might consider is outsourcing the investment of non-employer stock assets to a qualified investment manager who assumes fiduciary responsibility for managing the non-employer stock asset account.

If you any questions about the impact of these cases on your ESOP's investment strategy or the fiduciary duties associated with administering an ESOP, please contact the authors or another member of Holland & Knight's ERISA Litigation Team or ESOP Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.