DATE POSTED 24. 10. 2011, By

Failure to Remove Employer Stock from 401(k) Held Not a Breach of Fiduciary Duty

Employees of Chicago companies who participate in a 401(k) holding employer stock or an Employee Stock Ownership Plan are often attracted to owning stock in their employer because of the significant upside for the staff doing a good job for the employer. You are there at work every day, and you see how the business operates. So you can see how your (and your colleagues’) efforts will pay off. But holding employer stock in your retirement plan does not come without its risks. For example, one might say you have all your eggs in one basket. If your employer goes bankrupt, you not only are out of a job, but your retirement savings could be decimated. Fiduciaries of an ERISA retirement plan owe a duty of prudence with respect to the investments in the plan, and failing to take employer stock out of the retirement plan can be a breach of your employer’s, or some individuals who make such decisions, fiduciary duties.

Many employer plans “hard wire” the holding of employer stock into the terms of the plan. This means the plan document states one of the purposes of the plan is to hold employer stock. In such cases, the fiduciaries are given a broader deference in their decision over when they should make the decision to stop including employer stock in the plan, a so called presumption in favor of the retention of employer stock being reasonable. The seminal case on that point is Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Recently, the Second Circuit Court of Appeals (a significant court that sits in New York City) adopted that rule in Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir. Oct. 19, 2011). Plaintiffs in that case alleged it was a breach of fiduciary duty for fiduciaries of the McGraw-Hill 401(k) plan to not remove employer stock from the plan when the stock dropped 64% in value following the subprime mortgage crisis. The Second Circuit held that this presumption applies at the pleading stage, meaning it can cause a case to be dismissed if the proper facts are not pled.

Where the plan is subject to the Moench presumption, a plaintiff will generally have to allege that the employer stock faced a dire situation that was foreseeable to the fiduciaries. This is, of course, pretty vague language, and what it means can only be discovered through the case-by-case examples. If you have questions about your retirement plan including your employer’s stock, consult an ERISA lawyer.

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