Decline in security’s market price not enough by itself to sustain fiduciary breach claim

A decline in a security’s market price does not, by itself, give rise to a reasonable inference that holding the security as a pension plan asset was imprudent under ERISA’s fiduciary duty rules. Instead, a plan must allege facts that, if proven, would show a prudent fiduciary, acting in like circumstances, would have acted differently, the U.S. Court of Appeals in New York City (CA-2) has ruled. Thus, a pension plan’s fiduciary breach claim against the fiduciary-manager of its fixed-income portfolio, which in essence alleged the plan lost money due to a disproportionately heavy investment in mortgage-backed securities in 2007 and 2008, was properly dismissed under Rule 12(b)(6).

Plan investments

About 35% of a pension plan’s assets were held in fixed-income securities during the relevant time period, which included 2007-2008. In 2009, the plan filed suit against the investment manager responsible for the plan’s fixed-income portfolio, alleging that the plan lost $25 million dollars in asset value due to the investment manager’s imprudence in investing in mortgage-backed securities during the housing crisis. (The PBGC joined the suit later, after the employer’s bankruptcy resulted in the PBGC’s termination of the plan.)

The district court granted the investment manager’s motion to dismiss the plan’s complaint under Rule 12(b)(6).

Well pleaded claim

In affirming the district court’s dismissal of the plan’s claim, the appellate court echoed the district court’s view that a mere “hindsight critique” of the drop in value of a plan asset is not enough to sustain a fiduciary breach claim. ERISA’s prudent person standard focuses on the fiduciary’s conduct in arriving at an investment decision, not the result of the investment.

Ideally then, a well-pleaded breach of prudence claim will contain factual allegations relating directly to the methods employed by the ERISA fiduciary to investigate, select and monitor investments. However, given that most ERISA plaintiffs have no easy way to gain access to such facts prior to discovery, the court acknowledged that a breach of fiduciary claim may survive if based only on “circumstantial factual allegations”—but only when those allegations give rise to a “reasonable inference” that the fiduciary breached its duties.

The plan’s complaint, having been amended once, still failed to meet this standard. While the plan alleged the existence of commonly-known “warning signs” regarding the decline in value of mortgaged-backed securities held by other entities during the time period, such information, even if true, does not give rise to a plausible inference that the investment manager knew, or should have known, that the plan’s securities had become an imprudent investment. While it’s true a rapid decline in the price of a security would likely lead a prudent fiduciary to investigate whether it was still prudent to hold that investment, the plan’s complaint does not allege the investment manager failed to conduct such an inquiry.

Similarly, the plan neglected to allege the investment manager failed to properly diversify the fixed income portfolio or breached its duty to act in accordance with plan documents.

Source: PBGC v. Morgan Stanley Investment Management, Inc. (CA-2).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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