Opinion ID: 615595
Heading Depth: 5
Heading Rank: 1

Heading: The Moench Court's Policy Considerations

Text: The named plaintiff in Moench alleged that the fiduciaries of his ESOP breached ERISA standards of conduct by continuing to invest in employer stock despite the deterioration of the employer's financial condition. See Moench, 62 F.3d at 558-59. For our purposes, the issue in Moench was what standard of review is appropriate to test the fiduciaries' liability for their investment decisions. See id. at 568. See also Edgar v. Avaya, Inc., 503 F.3d 340, 346 (3d Cir.2007). To answer this question, the Moench court first considered the special status of ESOPs under ERISA. Moench, 62 F.3d at 568. Specifically, the court noted that ESOP fiduciaries are exempt from ERISA's duty to diversify, and from the statute's prohibition against dealing with a party in interest. Id. (discussing the exemptions under 29 U.S.C. §§ 1104(a)(2) and 1108(b)(1).) The court explained that these exemptions arise[ ] out of the nature and purpose of ESOPs themselves, id., which is to `invest primarily in qualifying employer securities,' Edgar, 503 F.3d at 346 (quoting 29 U.S.C. § 1107(d)(6)(A)). That ESOPs are undiversified means that they place participants' retirement assets at much greater risk than other ERISA plans. Moench, 62 F.3d at 568 (internal quotations omitted). But Congress did not intend ESOPs to guarantee retirement benefits. Id. Rather, Congress intended that ESOPs would function as both employee retirement benefit plans and as a technique of corporate finance that would encourage employee ownership. Id. at 569 (internal quotations omitted). Notwithstanding ESOPs' unique status, the Moench court emphasized that ESOP fiduciaries are still required to act in accordance with ERISA's standards of prudence and loyalty. See Moench, 62 F.3d at 569; see also Edgar, 503 F.3d at 346. According to the Moench court, the appropriate standard of review was thus one that would preserve a balance between, on the one hand, the goals of ESOPs, and on the other, ERISA's stringent fiduciary duties. In short, the appropriate standard of review would ensure that competent fiduciaries would not be deterred from service, and unscrupulous ones would not be given license to steal. Moench, 62 F.3d at 569 (internal quotations omitted). The court rejected plenary review as destructive of such balancing. See id. at 570. The court reasoned that strict judicial scrutiny of fiduciaries' investment decisions would render meaningless the ERISA provision excepting ESOPs from the duty to diversify. Id. In addition, the court feared that plenary review would risk transforming ESOPs into ordinary pension benefit plans, which would frustrate Congress's desire to facilitate employee ownership. Id. After all, the court asked, why would an employer establish an ESOP if its compliance with the purpose and terms of the plan could subject it to strict judicial second-guessing? Id. Finally, the court looked to the common law of trusts, which requires that interpretation of trust terms be controlled by the settlor's intent. Moench v. Robertson, 62 F.3d 553, 570 (3d Cir.1995). That principle is not well served in the long run by ignoring the general intent behind such plans in favor of giving beneficiaries the maximum opportunities to recover their losses. Id. To fashion the appropriate standard of review, the court again found guidance in the common law of trusts. See id. at 571. According to Moench, where a trust instrument requires the trustee to invest in a particular stock, the trustee is generally immune from judicial inquiry, id., see also Edgar, 503 F.3d at 346, but where the instrument merely permits a particular investment, trust law calls for plenary review of the investment decision, id. The fiduciaries in Moench were not required to invest in employer securities, but they were more than simply permitted to make such investments. Moench, 62 F.3d at 571. The court therefore determined that an intermediate abuse of discretion standard would strike the appropriate balance between immunity from judicial review, at one extreme, and de novo review, at the other. Edgar, 503 F.3d at 347; see also Moench, 62 F.3d at 571 ([T]he most logical result is that the fiduciary's decision to continue investing in employer securities should be reviewed for an abuse of discretion.). Pursuant to this deferential review, an ESOP fiduciary who invests plan assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities. Moench, 62 F.3d at 571. To do so, plaintiffs must show that the fiduciaries could not have believed reasonably that continued adherence to the ESOP's direction was in keeping with the settlor's expectations of how a prudent trustee would operate. Id. Thus, plaintiffs may introduce evidence to the effect that, owing to circumstances not known to the settlor and not anticipated by him, investing in employer securities would defeat or substantially impair the accomplishment of the purposes of the trust. [3] Id. (internal quotations omitted).