Saturday, July 03, 2010

Prudent Mien?

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger—perhaps the most common trigger—for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. Indeed, one has only to look at the two-month period following the struggle to contain the current oil spill in the Gulf of Mexico and the number of litigants and potential litigants circling the BP 401(k) plans to appreciate just how much more aggressive the plaintiffs’ bar has become in pursuing such actions.

That said, those who have been paying attention to how these cases have played out in court are doubtless aware that many, perhaps most, are not coming to trial at all. Rather, they have been dismissed with what, IMHO, is startling regularity, due to a “presumption of prudence.”

Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer's financial condition “deteriorated.” The Moench court (the 3rd Circuit) affirmed the duty of prudence, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an employee stock ownership plan (ESOP), and saw there a rebuttable presumption that an ESOP fiduciary that invested plan assets in employer stock acted consistently with ERISA (bearing in mind that, since Moench dealt with an ESOP, the plan document itself called for investment primarily in employer securities).

Now, I will admit to being something of a strict constructionist in my interpretation of the law. I am suspicious of those who manage to, through some jurisprudential alchemy, wrest unexpected (and likely unintended) legal conclusions by reading between the lines of the letter of the law. Further, I am generally distrustful of a process that builds on those kinds of legal “extensions” to base future determinations that are, IMHO, often far afield from the intentions of the law itself. After all, once you have established that 2 + 2 = 5, how hard is it to argue that 2 + 5 = 10?

Ironically—certainly in view of how the resulting Moench presumption has proven to be a powerful force in dismissing many of the stock drop cases at the pleading level—though the 3rd Circuit found a presumption of prudence, it reversed summary judgment for the committee/defendants because the facts alleged (precipitous drop in stock prices, committee members' knowledge of the impending collapse, and their conflicted loyalties as corporate insiders and fiduciaries), if proven, could overcome the presumption. And that finding came in the context of an ESOP, a plan design that, if not exempt from ERISA’s fiduciary strictures, would certainly seem to warrant a certain reasonable amount of fiduciary deference in the decision to hold employer stock.

That said, today the law of the land would seem to lie squarely on the side of plan fiduciaries who continue to hold out employer stock as a plan investment, come hell or high water (literally, in some cases). 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.

Plan fiduciaries have long been tempted by the allure of placing employer stock in these programs, and plan participants have, in large part, responded favorably1. Frankly, I find the rapaciousness of the plaintiffs bar on such matters to be unseemly at best—some downright unscrupulous—and many of the so-called “investigations” are nothing more than a fig-leaf-cloaked excuse to troll for potential litigants. Disaster can befall the best of firms, and stock prices sometimes tumble for reasons that have nothing to do with the fiduciary management of these plans.

That doesn’t mean that plan fiduciaries can pretend that they do not know things they clearly know as corporate fiduciaries; nor, as a recent amicus brief filed by the Labor Department on the broadening application of the Moench decision states, should the securities laws “immunize fiduciaries who knowingly incorporate false SEC filings into participant communications from liability under ERISA” (see “Solis Argues for Stock Drop Case Law Change”).

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role; and, IMHO, a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-Ă -vis his or her responsibility to the retirement plan is living in a state of active denial.

As for those not yet targeted by litigation, thus far the courts may have presumed that plan fiduciaries are entitled to a certain deference in such matters—but, IMHO, that’s stretching the letter of the law.

—Nevin E. Adams, JD



1 Nor, as some like to posture, are participants necessarily bludgeoned into investing disproportionately large sums of their retirement savings there. Sure, the match accounts for some, and perhaps displaced loyalty some more, but I have found that participants are simply more familiar—and comfortable—with that option.

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