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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.
Adopting the presumption of prudence that applies when a 401(k) plan requires stock of the sponsoring employer to be offered as an investment option, the Court of Appeals in New York City (CA-2) ruled that plan fiduciaries did not breach their ERISA duties by retaining company stock as an 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.
Exposure to subprime market results in stock drop
Plan participants alleged that plan fiduciaries breached ERISA duties of prudence and loyalty by refusing to divest the plans of company stock, even though its exposure to the imploding subprime securities market made it an imprudent investment option. According to the participants, the fiduciaries should have foreseen a drop in the price of the stock and either suspended the ability of participants to invest in the company stock fund or diversified the fund to reduce its holdings of stock.
The participants also charged that the Administration Committee and the company's CEO breached their ERISA duties by failing to provide complete and accurate information to the participants regarding the stock fund and its exposure to the subprime market. Implicit in the charge was the participants' assumption that the fiduciaries had a duty to independently investigate the accuracy of SEC filings made by the company which were relied upon by the participants in making investment decisions.
A federal trial court dismissed the participants' claims, ruling that the fiduciaries were entitled to the presumption that the investment in company stock, as required by the plans, was prudent (i.e., the "Moench presumption"). The court concluded that, despite the drop in the value of the company stock, the participants could not allege sufficient facts to rebut the presumption.
Prudence of stock fund as investment option
The Appeals Court affirmed the trial court, explaining that: (1) plan language mandating that the employer stock fund be included as an investment option and (2) the favored status Congress has granted to employee stock investments in their own companies, entitled the defendants to the presumption of prudence. Under the presumption of prudence adopted by the Third, Fifth, Sixth, and Ninth Circuits, a fiduciary's decision to continue to offer plan participants the opportunity to invest in employer stock is reviewed for an abuse of discretion, with the level of scrutiny increasing with the fiduciary's discretionary power over investments.
The court did not deny itself authority to review the decision by fiduciaries to continue to offer company stock as a plan investment option, even where the fiduciaries had minimal discretionary power over investment options. However, the court explained that only circumstances placing the employer in a "dire situation that was objectively unforeseeable to the plan's settlor" could require fiduciaries to override plan terms. The court did not define the circumstances creating a "dire situation." Mere stock fluctuation, however, would not be sufficient to establish the imprudence necessary to rebut the presumption. Similarly, awareness of circumstances that may impair the value of company stock or bad business decisions do not impose a fiduciary obligation to depart from plan requirements regarding company stock investments.
Failure to provide complete and accurate information
The participants alleged that the company, the plans' Administration Committee, and the company's CEO (1) failed to provide complete and accurate information regarding the company and (2) conveyed, through statements and omissions, inaccurate material information regarding the soundness of the company's stock.
Initially, the court ruled that fiduciaries have no duty under ERISA to provide plan participants with non-public information related to the expected performance of plan investment options, including company stock. Such information, the court noted, was not necessary to correct a previous misstatement or to avoid misleading participants. In addition, because the plan participants were fully apprised of the volatile nature of the stock fund, the defendants had no duty to forecast whether volatility would result in a sharp decline in the stock price.
The participants further alleged that the plans' SPDs directed participants to rely on the company's filings with the SEC, which contained materially false and misleading statements and which failed to adequately inform participants of the extent of the company's involvement in the subprime lending business. The court stressed, however, that a fiduciary may be liable only for misstatements that it knows to be false or to lack a reasonable basis in fact.
The participants charged that the committee members should have performed an independent investigation of the SEC filings before incorporating them into the SPDs. While conceding that such an investigation could be warranted, the court concluded that the participants did not allege specific facts that would constitute a "warning flag" to the fiduciary sufficient to warrant such an investigation.
Source: In re: Citigroup ERISA Litigation (CA-2).
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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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