Drop in value of employer stock fund was not reasonably foreseeable by fiduciaries

Plan fiduciaries were not liable for a decline in the value of employer stock that was not reasonably foreseeable based on the information available to the fiduciaries, according to the U.S Court of Appeals in New York (CA-2).

Plan did not require offering of employer stock

Employees participated in an individual account plan maintained by their employer that allowed for the offering of investment funds as designated by the plan committee and approved by the plan trustee. The plan did not require or encourage investment in employer stock or even mention the employer’s stock. However, the plan did offer employees the option of investing in a fund consisting of common stock of the employer. Employees who invested in the company stock fund alleged that, during the class period, the value of the employer’s stock was artificially inflated due to undisclosed business problems that rendered the stock an unduly risky investment for retirement assets.

A federal trial court dismissed the employees’ claims under ERISA that the plan fiduciaries breached duties of prudence and loyalty by continuing to offer the company stock fund during the claims period. The court also rejected the employees’ leave to file a proposed amended complaint, ruling that the amendment would be “futile.”

Decline in value of stock not reasonably foreseeable

Initially, the appeals court explained that, under the applicable presumption of prudence, if plan terms require or strongly favor investment in company stock, only circumstances placing the company in a dire situation that was objectively unforeseeable by the settlor could require plan fiduciaries to override such plan terms. The employee charged that the trial court required them to plead such “dire circumstances” even though the plan terms did not mandate or strongly favor an investment offering in company stock.

The appeals court, in the instant case, however, did not address the conditions for the application of the presumption, determining that the proposed amended complaint failed to state an ERISA prudence claim under “any” standard of review. The court acknowledged the 70% decline in the company’s stock price during the class period. However, the court focused on whether such a decline should have been reasonably foreseeable by the fiduciaries based on the information available to them. The court concluded that the employees did not plausibly ascribe knowledge of the company’s financial condition, including internal problems at the employer’s parent company, to the fiduciaries.

An internal memo allegedly highlighted serious problems with the parent company’s business model. However, the court did not find it plausible to impute notice of the parent company’s internal workings, including the subject of the memo, to members of the plan committee, who held only operational roles at the subsidiary. As the fiduciaries did not possess knowledge or information that was not available to the employees that should have reasonably led them to question the viability of the continued investment in the employers’ stock, the court would not hold the fiduciaries liable for the decline in the value of the stock.

Source: Majad v. Nokia, 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.

Visit our News Library to read more news stories.