Second Circuit Adopts Moench Presumption for Plans Mandating Investment in Employer Stock | Practical Law

Second Circuit Adopts Moench Presumption for Plans Mandating Investment in Employer Stock | Practical Law

The US Court of Appeals for the Second Circuit held in Gray v. Citigroup, Inc. that where plan language mandates an employer stock fund, the plan fiduciaries are entitled to a presumption of prudence; and their actions should be reviewed, using an abuse of discretion standard in allowing participants to continue to invest in the fund after a significant drop in price.

Second Circuit Adopts Moench Presumption for Plans Mandating Investment in Employer Stock

by PLC Employee Benefits & Executive Compensation
Published on 20 Oct 2011 • USA (National/Federal)
The US Court of Appeals for the Second Circuit held in Gray v. Citigroup, Inc. that where plan language mandates an employer stock fund, the plan fiduciaries are entitled to a presumption of prudence; and their actions should be reviewed, using an abuse of discretion standard in allowing participants to continue to invest in the fund after a significant drop in price.

Key Litigated Issue

On October 19, 2011, the US Court of Appeals for the Second Circuit issued an opinion in Gray v. Citigroup, Inc.. The key litigated issues were whether the plan fiduciaries breached their duties under ERISA by:
  • Continuing to offer an employer stock fund as an investment option in participant-directed retirement plans and failing to limit the participants' ability to invest in that fund when the value of the employer stock dropped significantly.
  • Failing to provide adequate and truthful information to participants on the expected performance of the company's stock.

Background

The plaintiffs participated in certain defined contribution retirement plans sponsored by Citigroup Inc. and Citibank, N.A. (the companies). The plans mandated that a fund comprised of shares of Citigroup common stock be included as an investment option. By offering the stock fund, the plans provided a vehicle that enabled plan participants to invest in the stock of their employer. The companies participated in the sub-prime mortgage market.
After a significant price drop in the Citigroup stock following the sub-prime market crisis, the participants filed a class action complaint alleging that the companies and the plans' fiduciaries breached their ERISA fiduciary duties. Specifically, the plaintiffs alleged that the defendants refused to divest the plans of Citigroup stock, even though the companies' ties to the sub-prime mortgage market made it an imprudent investment option. They also claimed that the fiduciaries failed to provide complete and accurate information to plan participants regarding the stock fund and its exposure to the risks associated with the sub-prime market. The district court granted the defendants' motion to dismiss, holding that:
  • The facts presented by the plaintiffs were insufficient to overcome the presumption that offering Citigroup stock, as required by the plans' terms, was prudent.
  • The plan administrators had no duty to disclose the companies' financial position to plan participants.

Outcome

The Second Circuit upheld the district court's ruling, holding that the fiduciaries did not breach their duty by allowing the plans to continue to offer an employer stock fund as an investment option after a significant price drop.
The Second Circuit decided to adopt the Moench presumption first established by the US Court of Appeals for the Third Circuit in Moench v. Robertson. This presumption provides that if a plan's language mandates investment in employer stock, the plan fiduciaries are entitled to a presumption of prudence in allowing employer stock to continue to be offered. The presumption can only be rebutted by establishing that the fiduciaries abused their discretion.
In applying the Moench presumption, the Second Circuit held that the plaintiffs did not plead sufficient facts to establish that the fiduciaries abused their discretion by continuing to offer plan participants the opportunity to invest in Citigroup stock. The defendant fiduciaries, according to the court:
  • Could not reasonably have foreseen, based on information available at the time, the sharp decline in the price of Citigroup stock; and were not compelled to conclude that the companies were in the kind of dire situation that would have required them to limit participants' investments in Citigroup stock.
  • Had no duty to provide plan participants with nonpublic information pertaining to the expected future performance of the plans' investment options.
The Court therefore affirmed the district court's dismissal of the case.

Practical Implications

The Second Circuit joins the Third, Fifth, Sixth and Ninth circuit courts in adopting the Moench presumption of compliance with ERISA when a plan fiduciary allows investment in employer stock according to plan documents. The decision gives some level of comfort to employers in the Second Circuit that they will not be breaching their ERISA fiduciary duties by following plan documents, if they do not abuse their discretion in doing so.

Court Documents