In two recent decisions issued by the Southern District of New
York, the court held that the decision to offer company stock in a
401(k) Plan during an economic downturn or despite the fact that
the stock's value was artificially high, will be afforded the
Moench presumption of prudence that may be overcome only
by proving that the employer was in a "dire situation"
that was objectively unforeseeable by the plan sponsor. The
Moench presumption provides that ERISA fiduciaries of an
ESOP or an Eligible Individual Account Plan, e.g. §401(k)
Plan, that offers company stock as an investment are presumed to
have acted prudently where the plan language requires or strongly
favors investing in company stock. This presumption was adopted in
2011 for cases arising in Connecticut, New York and Vermont in
In re Citigroup Litigation.
The plaintiffs in Coulter v. Morgan Stanley & Co.
filed a class action complaint alleging, among other things, that
the Defendant breached their fiduciary duties under ERISA by
funding all company contributions to its 401(k) and ESOP plans
solely in company stock despite knowing that the Defendant had $9.4
billion in mortgage-related write-downs as a result of the
deteriorating subprime housing market.
In In re Pfizer Inc.ERISA Litigation, plaintiffs
were current or former participants in defined contribution plans
sponsored by Pfizer that provided for investment in Pfizer
securities through participant contribution, employer matching
contributions or both. After the stock price dropped 52%,
Plaintiffs filed a class action lawsuit claiming that the Defendant
imprudently continued to offer company stock even though they were
aware that the stock price was artificially inflated because two of
Pfizer's drugs presented substantial risks of which the market
In both cases the company stock funds were mandated or strongly
favored by the plans to be included as an investment option.
Plaintiffs alleged the respective plan fiduciaries breached their
duties of prudence and loyalty by continuing to make contributions
in, and refusing to divest the plans of, company stock, even though
the company stock had become an imprudent investment option.
Plaintiffs also alleged a fiduciary breach resulting from the
fiduciaries' failure to provide complete and accurate
information to participants regarding the stock's risks.
In both cases, Defendants moved to dismiss the breach of fiduciary
claims by arguing that they were entitled to a presumption of
prudence as set forth by Moench. As noted above, this
presumption may be overcome. Although proof of an employer's
impending collapse may not be required to establish fiduciary
liability, mere stock fluctuations, even those that trend downhill
significantly, are insufficient to establish the requisite
imprudence to rebut the presumption. Rather, only circumstances
placing the employer in a dire situation that was objectively
unforeseeable by the plan sponsor could require fiduciaries to
override the Plans' terms.
Applying the abuse of discretion standard, the court concluded that
plaintiffs failed to allege facts sufficient to show that the
plans' fiduciaries either knew or should have known that the
Defendants were in the sort of dire situation that required them to
override the plan terms to limit participants' investments in
company stock. Plaintiffs were therefore unable rebut the
Moench presumption and state a claim for breach of
ERISA's duty of prudence for maintaining the company stock in
the Plans. In addition, the court held that fiduciaries have no
duty to provide plan participants with non-public information that
could pertain to the expected performance of plan investment
These cases reinforce the significance of careful plan drafting
regarding investment options and the degree of discretion given to
fiduciaries regarding company stock. Although each situation is
fact sensitive, these recent cases show that cases arising in
Connecticut, New York and Vermont should see the Moench
presumption applied in the early stages of the case. This approach
could save employers substantial legal fees in the event plan
participants challenge the use of company stock as an investment
under a plan.
As our readers know, federal and state departments of labor have intensified their scrutiny of independent contractor arrangements and are coordinating with the federal and state taxing authorities when misclassifications are found.
Courts often conclude that absent appropriate disclaimer language and statements in employee handbooks are "promises" to employees, binding employers to abide by these promises in their dealings with employees.
Employers sometimes rely on equitable arguments, such as "unclean hands" (which asserts that it would not be fair to hold an employer liable when the employee’s actions caused or contributed to his own injury or damages).