Opinion ID: 615595
Heading Depth: 1
Heading Rank: 3

Heading: A Presumption of ERISA Compliance in Employee Stock Ownership Plans and Eligible Individual Account Plans

Text: Plaintiffs' claims place in tension two of ERISA's core goals: (1) the protection of employee retirement savings through the imposition of fiduciary duties and (2) the encouragement of employee ownership through the special status provided to employee stock ownership plans (ESOPs) and eligible individual account plans (EIAPs). [3] Congress enacted ERISA to protect[ ] employee pensions and other benefits. Varity Corp. v. Howe, 516 U.S. 489, 496, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). As many courts have recognized, however, ESOPs, by definition, are designed to invest primarily in qualifying employer securities, 29 U.S.C. § 1107(d)(6)(A), and therefore place[] employee retirement assets at much greater risk than does the typical diversified ERISA plan, Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.1992); see also Quan v. Computer Scis. Corp., 623 F.3d 870, 879 (9th Cir.2010) (citing the tension between the duty of prudence and Congress's preference for employees' investment in employer stock). Due to the risk inherent in employees' placing their retirement assets in a single, undiversified stock fund, Congress has expressed concern that its goal of encouraging employee ownership of the company's stock could be made unattainable by regulations and rulings which treat employee stock ownership plans as conventional retirement plans. Tax Reform Act of 1976, Pub.L. No. 94-455, § 803(h), 90 Stat. 1520, 1590. Accordingly, Congress has encouraged ESOP creation by, for example, exempting ESOPs from ERISA's prudence requirement (only to the extent that it requires diversification) and from the statute's strict prohibitions against dealing with a party in interest, and against self-dealing. Moench v. Robertson, 62 F.3d 553, 568 (3d Cir.1995). ERISA requires that fiduciaries act in accordance with the documents ... governing the plan insofar as such documents... are consistent with the provisions of [ERISA]. 29 U.S.C. § 1104(a)(1)(D). The Act does not, however, explain when, if ever, plan language requiring investment in employer stock might become inconsistent with the statute's fiduciary obligations such that fiduciaries would be required to disobey the requirements of the ESOP and halt the purchase of, or perhaps even require the sale of, the employer's stock. The Third, Fifth, Sixth, and Ninth Circuits have addressed this question, and we find their decisions helpful. The Third Circuit, in Moench v. Robertson, 62 F.3d 553, adopted a presumption of compliance with ERISA when an ESOP fiduciary invests assets in the employer's stock. There, a participant in an ESOP challenged the ESOP's continued investment in employer stock after the stock's share price dropped from $18.25 per share to $0.25 per share over a two-year period. Id. at 557. The court noted that while ESOPs, unlike pension plans, are not intended to guarantee retirement benefits, id. at 568, ESOPs are covered by ERISA's stringent requirements, and [except for in enumerated circumstances not directly applicable here] ESOP fiduciaries must act in accordance with the duties of loyalty and care, id. at 569. The court proceeded to describe the standard by which it would judge an ESOP fiduciary's refusal to divest an ESOP of employer stock: [A]n ESOP fiduciary who invests the 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. Id. at 571. The court remanded the case to the district court for a summary judgment determination under this new standard. Id. at 572. More recently, the Third Circuit expanded this rule to include situations where, as here, an employer stock fund is one of many investment options in an EIAP. See Edgar v. Avaya, Inc., 503 F.3d 340, 347-48 (3d Cir.2007) ([W]e conclude that the District Court correctly determined that Moench 's abuse of discretion standard governs judicial review of defendants' decision to offer the Avaya Stock Fund as an investment option.). The Sixth, Fifth, and Ninth Circuits have all adopted the Moench presumption. In Kuper v. Iovenko, 66 F.3d 1447 (6th Cir.1995), the employer's stock price had dropped from more than $50 per share to just over $10 per share. Id. at 1451. The court agree[d] with and adopt[ed] the Third Circuit's holding that a proper balance between the purpose of ERISA and the nature of ESOPs requires that we review an ESOP fiduciary's decision to invest in employer securities for an abuse of discretion. Id. at 1459. A failure to properly investigate the prudence of continued investment in employer stock could not alone overcome the presumption; rather, plaintiffs were required to demonstrate that conducting such an investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident. Id. at 1460. The Fifth and Ninth Circuits have also applied the presumption to situations in which employer stock funds were offered as investment options within EIAPs. See Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir.2008) (The Moench presumption... applies to any allegations of fiduciary duty breach for failure to divest an EIAP or ESOP of company stock.); Quan v. Computer Scis. Corp., 623 F.3d 870, 881 (9th Cir.2010) (adopting the presumption because it is consistent with the statutory language of ERISA and the trust principles by which ERISA is interpreted). No court of appeals has rejected the presumption of prudence. We now join our sister circuits in adopting the Moench presumptionand do so with respect to both EIAPs and ESOPsbecause, as those courts have recognized, it provides the best accommodation between the competing ERISA values of protecting retirement assets and encouraging investment in employer stock. An ESOP or EIAP fiduciary's decision to continue to offer plan participants the opportunity to invest in employer stock should therefore be reviewed for an abuse of discretion. This presumption may be rebutted if an EIAP or ESOP fiduciary abuses his discretion in continuing to offer plan participants the opportunity to invest in employer stock. We endorse the guiding principle recognized in Quan that judicial scrutiny should increase with the degree of discretion a plan gives its fiduciaries to invest. See Quan, 623 F.3d at 883 (citing Kirschbaum, 526 F.3d at 255 & n. 9). Thus a fiduciary's failure to divest from company stock is less likely to constitute an abuse of discretion if the plan's terms requirerather than merely permitinvestment in company stock. We reject plaintiffs' argumentendorsed by the dissentthat we should analyze the decision to offer the Stock Fund as we would a fiduciary's decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan's terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value. See Kirschbaum, 526 F.3d at 256 n. 13; Quan, 623 F.3d at 881. Such a result would be particularly troublesome in light of the long-term horizon of retirement investing, which requires protecting fiduciaries from pressure to divest when the company's stock drops. Quan, 623 F.3d at 882 (quoting Kirschbaum, 526 F.3d at 254). Also, as a general matter, plaintiffs' proposal fails to adequately account for Congress's concern that employees' ability to invest in employer stock would be endangered were courts to apply ERISA to ESOPs and EIAPs in the same way they apply the statute to other retirement plans. See, e.g., Tax Reform Act of 1976, Pub.L. No. 94-455, § 803(h), 90 Stat. 1583, 1590 (expressing the concern that treating ESOP plans as conventional retirement plans will block the establishment and success of these plans). The dissent argues that, rather than providing an accommodation between competing interests, our adoption of the Moench presumption allows the policies favoring ESOPs to override the policies of ERISA. Dissent at 152. The policy concerns we cite today do not, in Judge Straub's view, justify the adoption of a standard of review that renders moot ERISA's `prudent man' standard of conduct. Id. at 148, 151. We emphasize in response that, more than simply accommodating competing policy considerations, the Moench presumption balances the duty of prudence against a fiduciary's explicit obligation to act in accordance with plan provisions to the extent they are consistent with ERISA. See 29 U.S.C. § 1104(a)(1)(D). When, as here, plan documents define an EIAP as comprised of shares of employer stock, and authorize the holding of cash and short-term investments only to facilitate the orderly purchase of more company stock, the fiduciary is given little discretion to alter the composition of investments. If we were to judge that fiduciary's conduct using the same standard of review applied to fiduciaries of typical retirement plans, we would ignore not only the policy considerations articulated by Congress but also the very terms of the plan itself. Our endorsement of Moench is therefore based not on indefensible policy concerns, Dissent at 154, but on a recognition of the competing obligations imposed on ERISA fiduciaries. The district court also ruled that defendants were insulated from liability because they had no discretion to divest the Plans of employer stock. In re Citigroup ERISA Litig., 2009 WL 2762708, at . We take issue with this holding because such a rule would leave employees' retirement savings that are invested in ESOPs or EIAPs without any protection at alla result that Congress sought to avoid in enacting ERISA. See Kuper, 66 F.3d at 1457 ([T]he purpose of ESOPs cannot override ERISA's goal of ensuring the proper management and soundness of employee benefit plans.). Especially in light of ERISA's requirement that fiduciaries follow plan terms only to the extent that they are consistent with ERISA, 29 U.S.C. § 1104(a)(1)(D), we decline to hold that defendants' decision to continue to offer the Stock Fund is beyond our power to review. Finally, we reject plaintiffs' argument that the Moench presumption should not apply at the pleading stage. The presumption is not an evidentiary presumption; it is a standard of review applied to a decision made by an ERISA fiduciary. Where plaintiffs do not allege facts sufficient to establish that a plan fiduciary has abused his discretion, there is no reason not to grant a motion to dismiss. See Edgar, 503 F.3d at 349 (applying Moench to grant a motion to dismiss because there was no reason to allow [the] case to proceed to discovery when, even if the allegations [were] proven true, [the plaintiff could not] establish that defendants abused their discretion); Gearren v. The McGraw-Hill Cos., Inc., 690 F.Supp.2d 254, 269 (S.D.N.Y.2010).