ERISA-Ninth Circuit Applies Moench Presumption To Find That 401(k) Plan Fiduciaries Did Not Imprudently Invest In Employer Stock

In Quan v. Computer Sciences Corporation, Nos. 09-56190 and 09-56248 (9th Cir. 2010), the plaintiffs, who were participants in a 401(k) plan (the “Plan”) maintained by Computer Sciences Corporation (“CSC”), brought a class action lawsuit under ERISA against the Plan’s fiduciaries. They claimed that, among other things, the fiduciaries imprudently invested plan assets in CSC stock. The district court granted summary judgment against the plaintiffs, and the plaintiffs appealed. The Ninth Circuit Court of Appeals affirmed the summary judgment. The Court stated, with respect to the plaintiffs’ claim of imprudent investment, that the Ninth Circuit was joining the Third, Fifth, and Sixth Circuits by adopting the rebuttable “Moench presumption” (based on Moench v. Robertson, 62 F.3d 553 (3d Cir.1995)) that fiduciaries acted consistently with ERISA in their decisions to invest plan assets in employer stock. In doing so, the Ninth Circuit reversed the position it took in In re Syncor ERISA Litig., 516 F.3d 1095 (9th Cir. 2008), in which it had declined to adopt the Moench presumption.

In this case, the Plan allowed participants to allocate and reallocate their voluntary contributions among fourteen diverse investment alternatives, which included a nondiversified fund holding CSC stock (the “CSC Stock Fund”). Under the Plan’s governing document, the Plan was required to make the CSC Stock Fund available for the investment of participants’ accounts. The plaintiffs’ claims arise from alleged material weaknesses in CSC’s stock option granting and tax accounting practices, which ultimately caused significant decreases in the value of CSC stock and an alleged loss of hundreds of millions of dollars in retirement savings to Plan participants who had invested in the CSC Stock Fund.

As to plaintiffs’ claim of imprudent investment in the CSC Stock Fund, the Court said that, under section 404(a)(1) of ERISA, a plan fiduciary is required to act “prudently” when determining whether or not to invest, or continue to invest, ERISA plan assets in the plan participants’ employer’s stock. Generally, a court’s task in evaluating a fiduciary’s compliance with this standard is to inquire whether the fiduciary, at the time he or she engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment. Further, despite previously declining to do so, the Court adopts the Moench presumption. When this presumption applies, as here, an investment of plan assets in employer stock is presumed to be prudent .

Continuing its analysis, the Court said that, to overcome Moench presumption, the plaintiffs must show that the fiduciary in question abused its discretion by investing in employer stock. If there is room for reasonable fiduciaries to disagree as to whether they are bound to divest from employer stock, the abuse of discretion standard protects a fiduciary’s decision to not divest. To show abuse, the plaintiffs must make allegations which clearly implicate the employer’s viability as an ongoing concern , or show a precipitous decline in the price of the employer’s stock combined with evidence that the employer is on the brink of collapse or is undergoing serious mismanagement. It would not be sufficient to show that continued investment in employer stock is not prudent, or that the fiduciary ignored a decline in stock price. The plaintiffs must show publicly known facts that would trigger the kind of careful and impartial investigation by a reasonable fiduciary that the plan’s fiduciary failed to perform. Here, the plaintiffs did not offer any issues of material fact that the Plan’s fiduciaries should have stopped investment in CSC stock, or that were otherwise sufficient to rebut the Moench presumption. Thus, the plaintiffs’ claim of imprudence fails.

Note: The Court could have been clearer on exactly when the Moench presumption is to apply. At one point, the Court indicated that the presumption will apply in any case involving an ESOP or “eligible individual account plan”, within the meaning of section 407(d)(3) of ERISA. At another point, the Court indicated that the presumption will apply whenever the terms of the plan require or encourage the fiduciaries to invest primarily in employer stock. In this case, notwithstanding the use of the word “primarily” by the Court, it is clear that the presumption would apply, because the Plan, by its terms, was required to make the CSC Stock Fund available for investment by participants’ accounts. It is not clear what will happen in the next case.

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