Presumption of prudence inapplicable where plan did not require investment in company stock

Fiduciaries of a savings plan who selected an employer stock fund as a plan investment option were not entitled to the presumption of prudence where the plan did not require or strongly encourage investment in company stock, according to the U.S. Court of Appeals in New York City (CA-2).

Company stock as investment option

A large financial concern maintained a Savings and Investment Plan (SIP) and a 401(k) Plus Plan (Plus Plan). Both arrangements were eligible individual account plans that enabled participants to allocate and invest personal funds among available investment options selected by plan officers.

A company stock fund was an available investment option under both plans during the class period. The SIP empowered the SIP Investment Committee with the discretion to add or delete authorized investment funds under the plan, including the company stock fund. The Plus Plan similarly empowered the Plus Plan Investment Committee. However, the Plus Plan identified the company stock fund as a “Core Tier” fund and explicitly stated that the investment committee “shall” provide the fund as an investment option under the plan.

Plan participants who invested in the company stock fund sustained losses when the value of the company stock fell nearly 74% between April 2007 and October 2008. The stock decline was primarily attributable to the company’s exposure to the risks of a $100 billion investment in subprime mortgage securities and other fixed income assets and a $43 billion write-down in assets that, plan participants charged, put the company of the “brink of collapse” in 2008.

Plan participants subsequently filed suit, primarily alleging that company and plan officers breached fiduciary duties under ERISA by imprudently continuing to offer participants in both plans the option of investing in the company stock fund. A federal trial court dismissed the participants’ claim, explaining that, because the Plus Plan required that participants be offered the option of investing in company stock and the SIP “strongly encouraged” the fiduciaries to offer the company stock investment option, the fiduciaries’ actions were entitled to a presumption of prudence. The fact that the company’s stock price declined by nearly 74%, the court advised, was insufficient to overcome the presumption of prudence, and no other factors suggested that the company’s solvency was in jeopardy.

Mere investment in company stock does not allow for presumption

In addressing the application of the presumption of prudence on appeal, the Second Circuit initially explained that the mere investment in employer stock does not entitle a fiduciary to the presumption of prudence. Because judicial scrutiny increases with the degree of discretion invested in plan fiduciaries, the failure to divest company stock will be less likely to constitute an abuse of discretion where plan terms require, rather than merely permit, investment in company stock.

The application of the presumption to the Plus Plan was not at issue, as the plan specifically required the company stock fund to be among the plan’s investment options. However, the SIP occasioned different analysis as it did not contain language specifically mandating that the company stock fund be offered as a plan investment option. The appeals court concluded that the SIP did not require or encourage the fiduciaries to offer the company stock fund as an investment option. The SIP merely listed the stock fund as a potential investment option, but did not restrict the trustees’ investment discretion. Further, the discussion of the distribution of dividends and voting rights accruing from the stock fund did not indicate strong encouragement for the fund.

The court was reluctant to apply to presumption to every individual account plan that merely named and defined the employer’s stock in the plan document and allowed for the offering of employer stock as an investment option. Such an expansive reading would undermine the purpose of the presumption, which was to address the tension between the competing ERISA values of protecting retirement accounts and encouraging investments in employer stock that exists primarily when fiduciaries are explicitly obligated under plan terms to offer employer stock to participants. Accordingly, the SIP fiduciaries were not entitled to an “especial presumption” that they behaved prudently merely by offering company stock to participants.

Source: Taveras v. UBS AG (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.