Election to make required plan contributions in company stock did not subject bank to fiduciary liability

An employer did not breach fiduciary duties under ERISA by electing to make required contributions to a 401(k) plan and ESOP in employer stock, rather than cash, according to the U.S. Court of Appeals in New York City (CA-2). The decision to fund plan contributions in company stock is not a fiduciary act, the court explained, even if the decision has a detrimental impact on the plan.

Plan contribution in employer stock

A bank maintained a 401(k) plan and an ESOP (the plan). In January 2007 and January 2008 the bank, pursuant to express authority in the plans, elected to make employer contributions to the plan in the form of bank stock, rather than cash. Subsequently, the value of the bank stock, reflecting the general economic downturn of the period, significantly, declined. As a consequence, the total combined value of the company stock in the plan fell from $2.2 billion at the end of 2007 to $670 million at the end of 2008. Plan participants brought suit, seeking to recover the losses sustained by the plan as a result of the drop in the bank’s stock price. Specifically, the participants alleged that company officials breached their duty of prudence under ERISA by electing to satisfy the plan’s contribution obligation with company stock.

The trial court initially ruled that the company officers were ERISA fiduciaries because they were authorized to determine whether to make the contributions in cash or company stock. However, the trial court, applying the “Moench presumption of prudence,” dismissed the case, concluding that the participants had not alleged sufficiently dire circumstances to warrant a rebuttal of the presumption.
Decision to fund plan contribution in stock as fiduciary function

The central issue on appeal was whether the company officers were fiduciaries who acted in a fiduciary capacity in electing to make the plan contributions in common stock. Initially, the Second Circuit explained that a party may be a de facto fiduciary to the extent he or she: (1) exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of plan assets, or (2) has any discretionary authority or discretionary responsibility in the administration of the plan. The discretionary acts, the court further stressed, must be undertaken with respect to plan management and administration. Settlor functions, such as those involved in the establishment, funding, or termination of the plan, the court advised, do not trigger ERISA liability. Thus, decisions related to the timing and amount of plan contributions are not viewed as fiduciary acts.

The Second Circuit concluded that the company officers’ decision to fund the plan contributions in company stock was not a fiduciary act because, at the time of the decision the company stock was not a plan asset. In addition, the court explained, the discretionary authority of the company officers did not extend to plan management, but was limited to the selection of the form of plan contributions.
The plan participants stressed the adverse effect on the plan of the decision to fund the plan with company stock. The court acknowledged that business decisions made in a settlor capacity may detrimentally impact a plan. However, the detrimental impact of a business decision will not subject such settlor conduct to fiduciary liability.

Source: Coulter v. Morgan Stanley & Company Inc. (CA-2).
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