ERISA-Sixth Circuit Rules That Continued Investment In Employer Stock Did Not Violate ERISA’s Prudence Rule

In Pfeil v. State St. Bank & Trust Co., No. 14-1491 (6th Cir. 2015), the Sixth Circuit Court of Appeals (the “Court”) was called on to apply recent developments in ERISA. The Court said that ERISA imposes a duty of prudence on plan fiduciaries when investing plan assets. This rule generally requires diversification of the investments. But to solve the dual problems of securing capital funds for necessary capital growth and of bringing about stock ownership by all corporate employees, Congress established a special kind of ERISA plan called an Employee Stock Ownership Plan (an “ESOP”). ESOPs are designed to invest primarily in qualifying employer securities, rather than to diversify across securities of many companies.

In 1995, continued the Court, the Third and Sixth Circuits adopted a presumption (the so called “Moench Presumption”) that an ESOP fiduciary’s decision to remain invested in employer securities is prudent. However, the Moench Presumption was eliminated by the Supreme Court in 2014 in Fifth Third Bancorp v. Dudenhoeffer (“Dudenhoeffer”).

The instant case, said the Court, concerns an ESOP for employees of General Motors (GM). In 2008, GM faced severe business problems that resulted, ultimately, in its bankruptcy. Those events gave rise to this case. Plaintiffs Raymond M. Pfeil and Michael Kammer (together “Pfeil”) were GM employees who, prior to GM’s most recent financial difficulties, elected to invest in the GM ESOP. Defendant State Street Bank (“State Street”) served as fiduciary of certain pension plans, including the Common Stock Plan, an ESOP maintained for employees of GM. The Common Stock Plan-which held GM common stock- lost money in 2008. But State Street declined to stop buying GM stock for the plan until November 8, 2008, and did not divest the fund of (i.e., sell) GM stock from the plan until March 31, 2009. Just over a week later, Pfeil filed this suit against State Street, claiming that its investment decisions to continue to buy and also to decline to sell GM common stock for the plan during certain dates in 2008 were actionably imprudent under ERISA.

The district court granted summary judgment to defendant/State Street. The Court affirmed the district court’s grant of summary judgment. Applying the ERISA prudence requirement after Dudenhoeffer, the Court found that, during the time period in question, State Street’s managers repeatedly discussed at length whether to continue the investments in GM that are at issue in this case. Given the prudent process in which State Street engaged, Pfeil failed to demonstrate a genuine issue about whether State Street satisfied its statutory duty of prudence.

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