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CCH® PENSION — 06/14/12

Presumption of prudence continues to shield fiduciaries from liability following drop in value of employer stock

Plan fiduciaries did not breach their ERISA duties by retaining company stock as an investment option, despite a significant drop in the value of the stock price, the U.S. Court of Appeals in New York (CA-2) has ruled. The mere decline in the value of the company’s stock price did not indicate that the company was in such a dire condition as to rebut the applicable presumption of prudence.

Company stock fund as plan investment option

JP Morgan maintained a 401(k) plan that allowed participants to invest individual account assets in company stock (JP Morgan Chase Stock Fund). The plan did not expressly require that participants purchase employer stock. However, the plan required that, prior to October 1, 2002, 50% of the matching contributions provided by JP Morgan to participants who had not attained specified age and service requirements would be automatically invested in the stock fund.

During the class period of April 1, 1999—January 2, 2003, JP Morgan’s stock price experienced a decline of nearly 55%. The stock retained significant value and rebounded from $15 to $25 per share by the end of the class period. However, plan participants who had invested in the employer stock fund brought suit under ERISA, alleging that JP Morgan: (1) negligently permitted plan participants to purchase and hold shares of JP Morgan common stock when it was imprudent to do so; (2) failed to disclose non-public information about the company and negligently misrepresented material facts to plan participants; and (3) failed to appoint appropriate fiduciaries, monitor those fiduciaries, and supply them with the information necessary to fulfill their duties. A federal trial court, in March 2010, granted JP Morgan summary judgment on the pleadings.

Presumption of prudence applied

Initially, the appeals court noted that, in October 2011, subsequent to the trial court’s ruling, the Second Circuit issued two opinions, effectively adopting the presumption of prudence that courts have been increasingly applying when a 401(k) plan requires the stock of the sponsoring employer to be offered as an investment option. Specifically, in In re Citigroup ERISA Litigation, the Second Circuit ruled that plan fiduciaries did not breach their ERISA duties by retaining company stock as a plan investment option despite a significant drop in value that may have been foreseeable because of the company’s deep exposure to subprime mortgage securities. The decline in the value of the stock did not indicate that the company was in such a "dire" situation as to make continued investment in its stock imprudent, the court explained.

CCH Note: The court applied similar reasoning in a companion case (Gearran v. McGraw-Hill Co., CA-2 (2011), 660 F.3d 605), ruling that fiduciaries are only required to divest the plan of employer stock when they know that the employer is in a dire situation.

Having adopted the presumption of prudence, the Second Circuit reviewed JP Morgan’s decision to continue to allow plan participants to invest in employer stock for an abuse of discretion. Affirming the trial court, the Second Circuit noted that the company was never in a dire situation, but remained a viable concern throughout the class period. The fact that the company’s stock price declined was not (pursuant to Citigroup and Gearran) sufficient to rebut the applicable presumption of prudence.

Failure to disclose nonpublic information

The court rejected the participants’ claim that the fiduciaries breached their duties by failing to disclose information about JP Morgan’s financial condition. Citing its ruling in Citigroup, the court explained that fiduciaries have no duty to provide plan participants with non-public information that could pertain to the expected performance of plan investment options.

Negligent misrepresentation of information

The participants also alleged that the fiduciaries made false or misleading statements about the company in SEC filings that were incorporated into the plan’s SPD and provided to the participants. The court, however, noted that the parties who prepared and signed the SEC filings were acting in a corporate capacity, rather than as ERISA fiduciaries. Accordingly, the parties could not be held liable for the misstatements in the SEC filings, even though those statements were incorporated into the plan’s SPD.

Source: Fisher v. JP Morgan Chase & Co. (CA-2).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

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

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