IMHO: Lessened, Learned?

I’m generally inclined to emphasize the awesome responsibilities that come with the “assignment”: the impact exerted on participant retirement savings; the admonition to ensure that fees paid by, and services rendered to, the plan are reasonable; the implications of the prudent expert rule; and the liability (and personal liability, at that), not only for your own acts, but for the acts of your co-fiduciaries (and hence an urgency around knowing who those co-fiduciaries are).  I’m inclined to talk about the limitations of ERISA 404(c) in providing a shield against all that potential liability.

I’ll remind them that the Labor Department considers them responsible for all participant-directed investments outside 404(c)’s provisions, and note how frequently participant directions tend to fall outside those provisions.  I’ll tell them how important it is to read the plan document, and to make sure the plan is operated according to its terms.  I will remind them that the power to appoint members to the plan committee has been found to extend fiduciary liability to those who do the appointing, and I will, from time to time, remind them that company stock has been called “the most dangerous plan investment,” in no small part because a group of 401(k) participants is a class-action litigant’s dream team.

And then we get a court decision like the 2nd Circuit’s recent holding in Gray v. Citigroup, Inc., and I wonder if I understand ERISA at all.

Gray is a “stock drop” case (see 2nd “Circuit Affirms Dismissal of Citigroup Stock Drop Charges”), brought on behalf of Citigroup participants whose 401(k) balances were invested in the stock of their employer, stock that dropped precipitously in value in the wake of the 2008 financial crisis, in response to the collapse of the subprime mortgage market.  As is common in such cases, the participant-plaintiffs alleged that the stock was retained as a plan investment option after it was no longer prudent to do so, and that those on, and who appointed, the plan investment committee were not only in a position to know that, but to know that well before the stock tumbled in value. 

However, the 2^nd Circuit noted—and supported—the determination of the lower court that “defendants had no discretion whatsoever to eliminate Citigroup stock as an investment option, and defendants were not acting as fiduciaries to the extent that they maintained Citigroup stock as an investment option.”  Moreover, it noted—and supported the District Court’s determination that “even if defendants did have discretion to eliminate Citigroup stock, they were entitled to a presumption that investment in the stock, in accordance with the Plans’ terms, was prudent….”

Now, how is it that the plan’s committee had “no discretion whatsoever” to deal with the company stock investment?  Quite simply, because the plan document called for that as an investment option.¹  That’s right, apparently the court felt that the plan fiduciaries had no choice in deciding to keep that option in the plan and available because, to put it simply, “the plan document made them do it.”² 

As for the alternative argument, the “presumption of prudence”?  Well, it’s come up before in Moench v. Robertson, a 3^rd Circuit decision not only cited here, but subsequently adopted by other courts.  In Moench, the 3^rd Circuit found that a plan sponsor that offered stock as an investment in an Employee Stock Ownership Plan (ESOP) was entitled to a presumption of prudence.³  Moench is an older case (1995), and from a time when suits based on employer stock investments were less prevalent than today. 

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¹ More specifically, the 2^nd Circuit noted that “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’”  And then it went on to decide that the plan fiduciary’s obligation to honor the terms of the plan document effectively displaced that discretionary authority.

² “When, as here, plan documents define an EIAP as ‘comprised of shares of” employer stock, and authorize the holding of ‘cash and short-term investments’ only to facilitate the ‘orderly purchase’ of more company stock, the fiduciary is given little discretion to alter the composition of investments.”

³ More than a year ago, I noted that “in effect, this ‘presumption of prudence’ seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.” (see “IMHO: Prudent Mien?”). 

More recently, such cases have become nearly as routine as a 100-point drop in the Dow, and the judicial system, honoring precedent, and what it has chosen to view as a Congressional endorsement for employer stock investment in these programs, has led a growing number of jurisdictions to summarily (if not peremptorily) dismiss many of these actions.  Indeed, when all is said and done, it now seems as though the courts are comfortable imposing a less stringent review of the decision to invest in employer stock than in any other investment on the retirement plan menu.⁴

Moreover, for those that have, since Enron anyway, worried about the potentially conflicting duties owed by certain committee members to shareholders and plan participants, the 2^nd Circuit provided a moment of unexpected “clarity,” resolving with a pen stroke a dilemma that has concerned plan fiduciaries for at least the past decade by declaring, “We also hold that defendants did not have an affirmative duty to disclose to plan participants non-public information regarding the expected performance of Citigroup stock….” 

Ironically, it was this very 2^nd Circuit that, just a few years ago, called to mind the notion that ERISA’s fiduciary standards of conduct are “the highest known to the law.”  Perhaps they still are, but, IMHO, this decision serves only to lessen that standard.

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⁴ One needn’t read between the lines here.  In the court’s own words, “We reject plaintiffs’ argument—endorsed by the dissent—that we should analyze the decision to offer the Stock Fund as we would a fiduciary’s decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan’s terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value.” (In the court’s defense, plan sponsors have, in fact, been sued for selling stock that later increased in value in a couple of rare situations.)

The 2^nd Circuit’s decision is available at http://www.ca2.uscourts.gov/decisions/isysquery/40f87846-627e-45bd-b655-ffdaceb148e3/3/doc/09-3804_complete_opn.pdf

You might also find the amicus brief filed by the Department of Labor instructive:  http://www.dol.gov/sol/media/briefs/citigroup(A)-12-28-2009.htm