Seventh Circuit applies Moench presumption at pleadings stage to dismiss stock drop case

A claim against retirement plan fiduciaries alleging a violation of ERISA’s duty of prudence in connection with a drop in the value of employer stock may be dismissed at the pleading stage if the participant’s allegations are not enough to overcome the Moench presumption of prudence, the U.S. Court of Appeals in Chicago (CA-7) has held. The Seventh Circuit joins the Second, Third and Eleventh Circuits in viewing the Moench presumption as a pleading requirement, rather than an evidentiary burden. (The Sixth Circuit has declined to apply the presumption of prudence at the pleadings stage (see, e.g., Pfeil v. State Bank and Trust Co.).

Individual account plan

Bank employees who participated in their employer’s individual account retirement plan could distribute their savings among more than 20 different investment funds, including an employer stock fund. The stock fund was an ESOP, and the plan’s governing documents required the stock fund to be invested in employer stock “no matter how dire” circumstances affecting the stock’s value might become. Due in part to risky loans approved by the bank during the housing crisis, the value of the stock fund dropped 54% between November 2006 and April 2010.

Plan participants filed suit claiming that plan fiduciaries violated their duty of prudence under ERISA §404 by continuing to offer the stock fund as an investment option despite its poor performance. The district court applied the Moench presumption, found the participants’ allegations could not overcome the presumption, and granted the fiduciaries’ Rule 12(b)(6) motion to dismiss the complaint.

Moench rationale

Under the Moench presumption, the Seventh Circuit explained, courts presume that where plan language directs fiduciaries to offer employer stock, an ESOP fiduciary’s decision to continue offering employer stock is prudent, unless participants can show circumstances so compelling that no reasonable fiduciaries would have thought they should continue to offer the stock as directed in the plan. The presumption enables ESOP fiduciaries to navigate the “razor’s edge” of ERISA’s simultaneous (and sometimes conflicting) demands of prudence and adherence to plan documents. As such, the presumption of prudence is not an evidentiary standard but a substantive legal standard of liability and conduct that must be met at the pleadings stage of litigation.

Applying this rationale, the Seventh Circuit affirmed the lower court’s dismissal. It’s true the value of the participants’ investment in the employer stock dropped, but not so drastically as to be considered dire circumstances. Further, the participants’ ability at all times to choose among multiple funds, and to transfer money between funds, mitigated the risk to participants of continuing to offer the fund.

Note: The court cautioned that its decision did not rest upon the plan’s “no matter how dire” prohibition against the divestment of employer stock. Such language is “strong,” the court recognized, noting that ERISA’s duty of prudence requires fiduciaries to follow plan documents only insofar as they are consistent with ERISA.

Source: White v. Marshall & Isley Corporation (CA-7).

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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