News & Information



5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 03/08/11

Decline in stock price did not establish company stock fund as imprudent investment option

Plan fiduciaries did not breach duties imposed under ERISA by including and maintaining a company stock fund as a plan investment option, according to the U.S. Court of Appeals at Chicago (CA-7) in Howell v. Motorola, Inc. and Lingis v. Dorazil. The ERISA 404(c) safe harbor did not shield the fiduciaries from the charge that the investment option was imprudent. However, absent "imminent financial collapse" of the company, the stock fund could not be treated as an imprudent option.

Stock drop follows failed business deal

A large U.S. telecommunications company lent over $1.8 billion to a Turkish company in 1999 pursuant to a project to improve the infrastructure for mobile telephone service in Turkey. The Turkish company, however, effectively defaulted on the loan in May 2001.

The stock of the company was trading at $30 per share on May 16, 2000, the day the company filed a 10-Q Report with the SEC that announced planned sales to the Turkish company, but did not disclose the financing arrangement. In March 2001, the company's proxy statement revealed that $1.7 billion of the company's $2.8 billion in gross long-term financing was tied up with the Turkish company. In April 2001, following further disclosures in the financial press, the company stock dropped from $14.95 to $11.50 per share. By the end of the class period under review, the value of the stock had increased to $15 per share. The stock fluctuated upwards, but closed at $15 per share on December 31, 2001, when the company reported a net loss of $5.5 billion for the year.

The company maintained a 401(k) plan that allowed participants to manage investments in their individual accounts. In addition, the plan was structured as an ERISA 404(c) plan, under which participants were solely responsible for allocating assets among the various funds offered and supported by the plan. Among the plan investment options was a company stock fund in which participants could invest up to 100 percent of their assets.

Plan participants invested in the company stock fund filed suit against the company, the profit-sharing committee, and various plan fiduciaries alleging that the fund violated ERISA by: (1) imprudently selecting and continuing to offer the company stock fund to plan participants despite knowledge of the failed business transaction with the Turkish company; (2) negligently or intentionally misrepresenting material information about the transaction or failure to disclose the information to plan participants; and (3) failing to appoint competent fiduciaries to the committee that ran the plan.

The trial court issued summary judgment for the fiduciaries, ruling that the fiduciaries' actions were shielded from liability under ERISA 404(c).

404(c) does not apply to claim of imprudent fund selection

The initial issue addressed by the court was the application of the ERISA 404(c) defense to the charge of imprudent fund selection. The court explained that ERISA 404(c) shields a fiduciary from liability for the consequences of decisions over which it had no control, but which were in the sole control of the participant. The court agreed with the Department of Labor that the selection of plan investment options and the decision to continue offering a particular investment vehicle are acts to which fiduciary duties attach. These acts are not within a participant's power to control and, thus, the court explained, are not acts to which the 404(c) safe harbor applies.

ERISA 404(c), accordingly, did not shield the fiduciaries from liability for the allegedly imprudent decision to include the company stock fund in the plan's investment menu. However, the court rejected the argument that the mere drop in the price of the company stock was sufficient proof that the company stock fund was an imprudent investment choice. The existence of other investment options in the plan, the court reasoned, offered assurances that the plan was adequately diversified and that a participant's retirement portfolio could not be held hostage to the company's fortunes.

In addition, the court stressed that the evidence did not indicate that the company was facing "imminent collapse." The volatility of the company stock was within the bounds of reason and expectation as described in plan documents. The company was financially sound and nothing should have tipped the plan fiduciaries off to the proposition that the company's stock fund had "become so risky or worthless" that the company stock fund had to be withdrawn from the plan immediately.

CCH Note: The impact of the fact that ERISA 404(c) does not shield allegedly imprudent investment choices is, thus, effectively neutralized by the high threshold for liability established by the Seventh Circuit. Under the standard articulated by the Seventh Circuit, a company stock fund will not be treated as an imprudent investment option absent evidence of the "imminent collapse" of the company.

For more information, visit

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.