The U.S. Court of Appeals for the Sixth Circuit held that the
presumption of prudence for the holding of employer stock in a
retirement plan (the "Moench presumption") does
not apply at the pleadings stage. It also held that ERISA's
safe harbor defense for losses caused by a participant's
exercise of control does not apply to the selection of investments
a plan offers. The decision, Pfiel v. State Street Bank and
Trust Company, No. 10-2302 (6th Cir. Feb. 22, 2012), is
available here.
Pfiel involved two 401(k) plans sponsored by General
Motors Co. (the "Company"), each of which allowed
participants to invest in a fund comprised of Company stock.
According to the court's decision, the plan documents directed
the bank trustee to divest the plans' holdings of Company stock
if it "determines from reliable public information that (A)
there is a serious question concerning [the Company's]
short-term viability as a going concern without resort to
bankruptcy proceedings; or (B) there is no possibility in the
short-term of recouping any substantial proceeds from the sale of
stock in bankruptcy proceedings." After various public
disclosures by the Company in 2008, the trustee suspended purchases
of Company stock. The participants sued under ERISA because,
allegedly, the trustee did not divest the plans' Company stock
holdings until the following year. The district court dismissed the
complaint. It held that while the complaint pleaded sufficient
facts to overcome the presumption of prudence in holding Company
stock, the complaint failed to demonstrate that the trustee's
actions caused any losses to the plans given that participants
remained free to move their plan holdings to investments other than
the Company stock fund at any time.
The Sixth Circuit began its opinion by holding that the
Moench presumption "is not an additional pleading
requirement and thus does not apply at the motion to dismiss
stage," even though the court noted that it was not necessary
to decide that question to rule on the appeal. The court
nonetheless held that the presumption was an evidentiary one. The
court recognized that other circuits, most notably the Second and
Third, take a different approach and apply the presumption at the
pleading stage – with the Second Circuit in its recent
Citigroup decision (reported in the
December 2011 ERISA Litigation Update) holding that the
presumption was not simply an evidentiary one. The Sixth Circuit
explained that under its articulation of the Moench
presumption, the evidence required to rebut the presumption is
broader than the evidence needed to rebut the presumption in other
circuits. Given this difference, the court held that it was not
appropriate to apply the presumption at the pleadings stage in its
circuit.
The court then reversed the lower court's holding as to
causation. The Sixth Circuit held that a "fiduciary cannot
avoid liability for offering imprudent investments merely by
including them alongside a larger menu of prudent investment
options." It went on to address ERISA's safe harbor
provision, Section 404(c), which provides that a fiduciary shall
not be liable for losses that result from a participant's
exercise of control. The court held that the defense (i) was not
applicable at the pleadings unless the plaintiff anticipates the
defense and addresses it in the pleadings, and (ii) "does not
relieve fiduciaries of the responsibility to screen
investments." In this later holding, the court followed the
decision last year of the Seventh Circuit (reported in the
March 2011 ERISA Litigation Update) and the view of the
Department of Labor that Section 404(c) "does not serve to
relieve a fiduciary from its duty to prudently select and monitor
any service provider or designated investment alternative offered
under the plan."
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