Duty of prudence not breached by fiduciaries’ failure to act in wake of decline of value in employer stock


401(k) plan fiduciaries did not breach their duty of prudence under ERISA when they failed to divest the plan of an employer stock fund during a period when criminal prosecutions over product safety led to a 30% decline in share value, the U.S. Court of Appeals in New York City (CA-2) has ruled.

Presumption of prudence

In In re Citigroup ERISA Litigation, the Second Circuit explained its view that ERISA fiduciaries whose plans include employer stock as an investment should be offered a presumption of prudence.

Courts should review such fiduciaries’ conduct only for abuse of discretion. In conducting such a review, courts should consider (1) whether plan terms require or strongly favor investment in employer stock and (2) assuming the plan is so construed, was the employer in a “dire situation,” unforeseeable by the plan’s drafters, that required fiduciaries to override plan terms.

Plan terms

The terms of the plan at issue strongly favored that the stock fund be offered to employees. For example, the plan named the stock fund as the default investment in situations where employees failed to select an investment option for certain employer-funded contributions.

Secondly, mere fluctuations in stock value, even those where value declines significantly, are not the “dire situation” necessary to state an ERISA prudence claim against the charged fiduciaries. Stock performance need not be optimal for fiduciaries to retain the presumption of prudence. The inquiry should focus instead, the court explained, on how negative events in the short term affect the suitability of employer stock as a long-term retirement investment.

While it’s true that the Second Circuit’s formulation of the presumption of prudence in the Citigroup case differs from that enunciated by the district court’s ruling (which was issued prior to the decision in Citigroup), the appellate court declined to vacate the lower court’s ruling. An appellate court can affirm a lower court’s ruling on grounds different than those relied upon by the district court, so long as the conclusions of law have a basis in the record.

Source: In re GlaxoSmithKline ERISA Litigation (CA-2).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

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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