In two companion cases, In re: Citigroup ERISA Litig., No. 09-3804-cv (2nd Cir. 2011) and Gearren v. McGraw-Hill Companies, Incorporated, Nos. 10-792-cv (L), 10-934-cv (Con) (2nd Cir. 2011), the Second Circuit Court of Appeals (the “Court”) adopted the “Moench Presumption” . Under the Moench presumption, plan fiduciaries are presumed to have acted prudently, in accordance with ERISA, when the terms of the plan require or permit an investment in employer stock, and the fiduciaries have invested, or have permitted investment of, the plan’s assets in employer stock under that requirement. In the Gearren case, the Court said the following about this presumption.
We adopt the Moench presumption and review defendants’ decision to continue to allow Plan participants to invest in employer stock, in accordance with the Plans’ terms, for an abuse of discretion. See Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (“[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.”). Plan fiduciaries are only required to divest an EIAP [that is, an eligible individual account plan] or ESOP of employer stock where the fiduciaries know or should know that the employer is in a “dire situation.” Edgar v. Avaya, Inc., 503 F.3d 340, 348 (3d Cir. 2007). “Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the presumption.” Wright v. Or. Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004).
Basically, in Gearren and Citigroup, the plaintiffs were appealing from a dismissal of their claims by the district court. The plaintiffs had alleged, among other things, that the defendants-as plan fiduciaries- acted imprudently, in violation of ERISA, by continuing to include employer stock as an investment option in the companies’ EIAP retirement plans after a significant stock drop. In both cases, applying the Moench Presumption, the Court ruled that the facts alleged by plaintiffs, even if proven, were insufficient to establish this ERISA violation. Those facts did not prove that the defendants knew or should have known that the companies were in dire situations. As such, in both cases, the Court upheld the district court’s dismissal of the plaintiffs’ claims.
The Second Circuit, along with the Third, Fifth, Sixth and Ninth Circuits, have now adopted and applied the Moench presumption.