EMPLOYER SECURITIES IN QUALIFIED
David A. Cohen
William E. Ryan III
Evercore Trust Company, N.A.
David A. Cohen. Esq., Senior Vice President and Fiduciary Counsel,
Evercore Trust Company NA
Valeria Garcia-Tufro. Esq., Vice President, Evercore Trust Company,
William E. Ryan III. Esq., Managing Director and Chief Fiduciary
Officer, Evercore Trust Company, N.A
The authors would like to gratefully acknowledge the contributions of the prior authors of this
outline: Norman Goldberg, Vice Chairman, Evercore Trust Company, N.A, and David MolloChristensen, Esq., Milbank, Tweed, Hadley & McCloy LLP
Investments in employer stock can be made by:
Defined benefit plans; and
Defined contribution plans including most prominently 401(k) plans, as well as
profit sharing plans and ESOPs (Employee Stock Ownership Plans).
Employer stock investments in the differing types of plans covered by the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”):
Serve different objectives;
Operate under similar provisions and exceptions under ERISA; and
Create different legal risks and liabilities.
STATUTORY FRAMEWORK – EMPLOYER STOCK AND ERISA FIDUCIARY
ERISA expressly permits employee benefit plans to acquire and hold employer securities
provided certain conditions are met. Below are set forth the general statutory provisions,
applicable to both defined benefit plans and defined contribution plans except as
Various sections of ERISA apply to the management of employer securities by a
ERISA § 404: Duties of Loyalty and Prudence
ERISA § 404 governs all fiduciary actions with respect to a plan and affects employer
securities offered as an investment option or held by a defined contribution plan or held
by a defined benefit plan.
Loyalty: An ERISA fiduciary is required to act “solely in the interest” of the
plan’s participants and beneficiaries and for the “exclusive purpose” of providing
benefits to participants and beneficiaries and defraying reasonable administrative
costs of the plan. (ERISA § 404(a)(1)(A)).
If a fiduciary puts its own interests ahead of those of the plan participants
and beneficiaries, it violates this rule.
Bad faith is not required for a finding that the exclusive purpose rule has
Fiduciaries may take actions which incidentally benefit the employer if
they reasonably conclude, based on a prudent inquiry, that such actions are
also in the best interests of the plan.
The Prudence Standard: A fiduciary must act “with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent man acting in
like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character with like aims.” ERISA § 404(a)(1)(B).
A prudent process, which may require an independent investigation, is an
important component in any evaluation of the prudence of the analysis that
forms the basis for the fiduciary’s decision. The effect of the decision
(i.e., whether an investment succeeded or failed) is not determinative.
When the fiduciary does not have the requisite expertise to make a prudent
judgment on its own, it may be advisable to engage financial or legal
advisors, knowledgeable fiduciaries, or consultants.
Diversification: An ERISA fiduciary is required to “diversify the investments of
the plan so as to minimize the risk of large losses, unless under the circumstances
it is clearly prudent not to do so.” ERISA § 404(a)(1)(C).
A defined contribution plan is exempt from the diversification requirement
(and, from the prudence requirement, to the extent that prudence would
require diversification) when it acquires or holds qualifying employer
securities or real property. ERISA § 404(a)(1)(D).
The Pension Protection Act of 2006 (PPA) requires that participants who
are age 55 and participate in a defined contribution plan may be permitted
to transfer that portion of their account balance invested in publicly traded
employer securities into at least three other investment options. Such
rights must be provided to participants at all times with respect to elective
deferrals and after-tax contributions. Participants must be notified of their
diversification rights no later than 30 days prior to the first date on which
they may exercise such rights.
Acting in Accordance with Plan Document Provisions: A fiduciary must act in
accordance with the “documents and instruments” governing the plan insofar as
such documents and instruments are consistent with ERISA. ERISA §
ERISA § 404(c): ERISA § 404(c) creates a safe harbor from liability for
fiduciaries of eligible defined contribution plans which permit participants to
exercise control over the assets in their accounts. This provision is the subject of
a DOL exemption which has been the battleground of several conflicting
In order to take advantage of this safe harbor the plan must provide
participants the opportunity to exercise meaningful, independent control
over the assets in their accounts.
The exercise of meaningful, independent control means participants must
have the opportunity to:
Choose from among at least three diversified investment options
with materially different risk and return characteristics;
Participants must receive sufficient information to make informed
decisions; and be able to affect returns on the assets in their
The plan must give participants the opportunity to provide
investment instructions to an identified plan fiduciary required to
follow such instructions.
In addition, if employer stock is offered as an investment option:
The stock must be traded on a national exchange or other
recognized market with sufficient frequency and volume
to assure prompt execution;
Participants and beneficiaries must be provided the same
information as other shareholders;
Voting and similar rights must be passed through to
Procedures must be established to ensure the
confidentiality of participant or beneficiary investment
information, including information relating to the exercise
of voting, tender or similar rights, and a plan fiduciary
must be designated to review and monitor compliance
with the procedures.
However, there is no actual control if:
the fiduciary has concealed material non-public information;
a participant or beneficiary is subject to undue influence; or
a participant or beneficiary is incompetent.
The PPA added relief for fiduciaries who invest participant assets, in the
absence of participant direction, in certain qualified default investment
The DOL’s Participant Disclosure Regulation, 29 C.F.R. § 2550.404a-5,
implemented a number of mandatory disclosure requirements for
participant-directed individual account plans. In addition to mandating
many of the previously voluntary disclosure requirements under ERISA §
404(c), the Participant Disclosure Regulation contains a number of
requirements specific to plan investments in employer securities. These
rules can be found at 29 C.F.R. § 2550.404a-5(i)(1). Importantly, the rule
different in significant respects depending on whether an employer stock
fund is unitized (participants hold units of a fund that invests in employer
securities) or share accounted (participants’ plan accounts are credited
with actual shares).
ERISA § 406: Prohibited Transactions
ERISA § 406 prohibits certain direct or indirect transactions between a plan and a party
in interest to the plan. The contribution of employer securities to a defined benefit plan
must comply with the requirements of ERISA § 407 and be exempt under ERISA § 408
to avoid being a prohibited transaction.
Prohibited transactions include:
Sale, exchange, or leasing of any property (includes securities and real
property) between a plan and a party in interest. ERISA § 406(a)(1)(A);
Lending of money or other extension of credit between the plan and a
party in interest. ERISA § 406(a)(1)(B);
Furnishing of goods, services or facilities between the plan and a party in
interest. ERISA § 406(a)(1)(C);
Transfer to, or use by or for the benefit of, a party in interest, of any assets
of the plan. ERISA § 406(a)(1)(D); and
Acquisition, on behalf of a plan, of any employer security or employer real
property in violation of § 407(a). ERISA § 406(a)(1)(E).
ERISA § 406(b): prohibits a fiduciary from acting in its own self-interest to the
detriment of the plan.
Protects plan participants against transactions that present conflicts of
ERISA § 407: Limitations on Investments in Employer Securities
Plans are generally prohibited from holding employer securities or real property
that are not “qualifying employer securities” or “qualifying employer real
Limitations apply to the amount of qualifying employer securities that a defined
benefit plan can acquire:
Protects against self-dealing on the part of the plan fiduciary.
10% Limit: Immediately after the acquisition, the aggregate value of all
qualifying employer securities and qualifying employer real property held
by the plan (including that acquired in the contribution) cannot
exceed 10% of total plan assets. ERISA § 407(a).
The 10% limitation does not apply to defined contribution plans,
which can invest up to 100% of their assets in employer stock but
only if the plan “explicitly provides [such] acquisition and holding
of employer securities.” ERISA § 407(d)(3)(B).
The 10% limitation is only tested immediately after an acquisition.
Increases in a plan’s holdings due to appreciation or stock
dividends do not cause the 10% limit to be retested.
25% and 50% Tests: Immediately after the acquisition of the employer
securities (ERISA § 407(f)(1)):
25% of class limit on plan’s holding. The plan cannot hold more
than 25% of the aggregate amount of issued and outstanding stock
of the same class of stock.
50% of class must be independently held. At least 50% of the
aggregate amount of issued and outstanding stock of the same class
must be held by persons independent of the issuer.
Independence is a facts and circumstances test.
ERISA § 408: Prohibited Transaction Exemptions
ERISA § 408(e): provides a statutory exemption from the prohibitions of ERISA
§ 406, allowing a plan to acquire and hold employer securities, subject to a
number of requirements.
In the case of a security for which there is a generally recognized
market, adequate consideration means either:
The price of the security prevailing on a national
securities exchange as of the time of acquisition; or
If the security is not traded on such an exchange, a
price not less favorable to the plan than the offering
price for the security as established by the current
bid and asked prices quoted by persons independent
of the issuer and of any party in interest.
In the case of an asset other than a security for which there is a
generally recognized market (including employer securities that
are not publicly traded), the fair market value of the asset as
determined in good faith by the trustee or named fiduciary
pursuant to the terms of the plan and in accordance with
regulations promulgated by the DOL.
Satisfy the requirements set forth in ERISA § 407.
No commission may be charged with respect to the acquisition. ERISA §
408(e)(2). Commission is defined broadly to include “any fee,
commission or similar charge paid in connection with a transaction.” 29
C.F.R. § 2550.408e(2).
ERISA § 410: Indemnification
ERISA § 410(a): prohibits any agreement which purports to relieve a fiduciary of
fiduciary responsibility. The DOL since 1977 has interpreted ERISA § 410(a) to
permit “[indemnification provisions which leave the fiduciary fully responsible
and liable, but merely permit another party [other than the plan] to satisfy any
liability incurred by the fiduciary in the same manner as insurance....” (29 C.F.R.
2509.75-4), provided the plan does not bear responsibility for fiduciary breaches.
The plan sponsor may agree to bear such responsibility.
The DOL’s interpretation historically had permitted such indemnification to
include advancement of legal fees by the plan sponsor pending final resolution of
allegations of breach of fiduciary duty, provided the fiduciary agreed to repay any
advanced amounts if it was found to have breached its fiduciary duty and the
fiduciary had the financial wherewithal to repay advanced fees in the event of an
ESOP-owned companies and indemnification:
Unlike most other defined contribution plans, a private-company ESOP
often owns a significant portion (i.e., up to 100%) of the plan sponsor’s
outstanding securities. Where a plan is an ESOP, the plan’s assets do not
include the company’s assets. 29 C.F.R. § 2510.3-101(h)(3).
Recent court decisions have sowed confusion as to whether an
ESOP-owned company can advance fees to a fiduciary under the terms
outlined above. See Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009),
Fernandez v. K-M Indus. Holding Co., 646 F. Supp. 2d 1150 (N.D. Cal.
2009), Harris v. GreatBanc Trust Company, No. EDCV12-1648-R
(DTBx), 2013 U.S. Dist. LEXIS 43888, 555 E.B.C. (BNA) 1312 (C.D.
Cal. March 15, 2013). In addition to being inconsistent with earlier DOL
pronouncements and interpretations of ERISA regulations, they have
created a high degree of uncertainty for ESOPs and ESOP service
In Johnson, the court rejected advancement of legal fees for
a 100% ESOP-owned company. The court held that because the
company was 100% owned by the ESOP, enforcing the
indemnification provision would result in indemnification by the
In Fernandez, the court – following Johnson – invalidated an
indemnification provision where the ESOP owned 42% of the
company. The court held that indemnification agreements are
invalid if the ESOP “would bear the financial burden of
indemnification, whether directly or indirectly.”
The indemnification provision provided that the
trustee would not be entitled to indemnification for
losses or costs finally determined to have resulted
from the trustee’s gross negligence or willful
misconduct, but did not state that indemnification
would not apply in the case of a finding of a breach
of its fiduciary duty.
The DOL has taken a more aggressive position in at least one DOL
letter, dated Dec. 14, 2010.
The court held that the indemnification provisions at
issue, which it read to indemnify the defendants
except in the case of liability involving deliberate
wrongful acts or gross negligence, limited the
defendants’ liability for breaches of fiduciary duty
under ERISA. As such, the indemnification
provisions were void under ERISA § 410.
The DOL took the position that indemnification of
unidentified indemnitees is void under ERISA § 410,
where fees are advanced but repayable in the event
of a final judgment that losses did not result from the
gross negligence, willful misconduct, or breach of
fiduciary duty under ERISA of an indemnitee.
Because the ESOP owned 42.9% of the company,
the DOL asserted that indemnification by the
company under these terms effectively amounted to
an impermissible indemnification by the plan,
although the indemnification clause appeared
generally consistent with earlier DOL
In Harris, the court rejected the DOL’s argument that
indemnification of an ESOP trustee by a 100% ESOP-owned
company is void under ERISA § 410 because the anti-exculpatory
language of ERISA § 410 extends to settlement agreements.
The DOL argued that the indemnification clause was
void because (1) in the event of a settlement, the
trustee would be entitled to indemnification if it
admitted as part of the settlement to a breach of its
fiduciary duties under ERISA, and (2) the
indemnification clause did not specify how the
trustee would reimburse the company for advance
legal costs if a court ultimately determined that the
trustee breached its duties under ERISA.
The court rejected the DOL’s arguments. In addition
to finding no legal support for extending ERISA §
410 to settlement agreements, the court noted that as
a settling party the DOL could condition its consent
to a settlement “on any terms it believes are
appropriate.” The court also found the DOL’s
concerns regarding how the company may be
reimbursed for advanced fees not sufficient to
warrant setting aside the indemnification agreement,
as the DOL could seek a bond in the event a court
ultimately determined that the trustee breached its
fiduciary duties under ERISA.
DEFINED CONTRIBUTION PLANS
There has been substantial litigation brought against plan fiduciaries of defined
contribution plans arising out of the holding of employer stock. Litigation risk will
continue until there is a clear judicial resolution. Until such time, there are ways of
minimizing litigation risks. While none of these factors for mitigating risk guarantees
that fiduciaries or companies will be immune to litigation, a combination of these factors
has commonly played a role in the resolution of claims in favor of defendants.
Potential approaches to limiting exposure to liability:
Define and clarify limits of fiduciary roles with respect to company stock and
consider removing or replacing fiduciaries who are employees of the company
from the process.
Inside fiduciaries will generally possess knowledge about the financial
condition of the company and will likely acquire such knowledge before
most outsiders, which in turn heightens risks.
The materiality of inside information will often be judged in hindsight.
Revise the plan design to include a clear statement of company intent regarding
company stock as a permanent feature of the plan, the availability of other
investment options, and participant freedom to invest in any option, all of which
have been favorable factors in decisions holding against plaintiffs.
A clear statement of company intent can be central to managing liability in
this context and may be effective in defending against allegations of
breach of fiduciary duty resulting from a drop in the stock price that does
not threaten viability, even if such drop is severe.
The company’s expressed intent may establish the standard for
prudence in investing in company stock.
Consider stating that the company’s intent is for the employer
stock fund to invest exclusively in company stock (other than short
term investments targeted to fund participant transactions into and
out of the fund).
Consider including a statement describing the circumstances under
which the company would not want the fiduciary to continue to
hold company stock.
An ambiguous standard for investment in the employer stock fund:
Increases the burden of and risks associated with the company’s
duty to monitor and the company’s exposure to indemnification
Weakens the resulting protection for an appointed fiduciary.
Reduce exposure to inside-information claims as much as possible.
Companies may appoint an independent fiduciary to:
Manage company stock consistent with plan objectives;
Exercise proxy-voting responsibility;
Exercise fiduciary responsibility for prohibited future plan
investments in company stock, increasing the cash position of the
company stock fund, or terminating the fund, in accordance with
the terms of the plan.
An independent fiduciary typically does not have access to material
non-public information in discharging its duties to the plan.
Appointment of an independent fiduciary reduces potential conflict of
interest liability concerns.
Remind participants that in the ordinary course they must decide whether
to invest in company stock thought the plan. In the typical public
company 401(k) plan, participants will have investment control over the
company stock allocated to their accounts and will have a wide variety of
other investment funds from which to choose.
Communicate clearly to participants that company stock is intended to be
a permanent investment option that will be maintained to the maximum
extent permitted by ERISA, which has commonly been interpreted to
mean as long as the company is viable.
Emphasize the value of diversification, the risks associated with a single
stock portfolio, and the fact that a participant has no obligation to invest in
If an independent fiduciary is appointed, inform participants of the
standard under which the independent fiduciary is operating.
It is important to establish that the independent fiduciary’s role is
not to protect participants’ from price fluctuations or declines in
the price of the company stock.
Despite the statutory exemption protecting investments in employer
securities from the duty to diversify, employer stock funds are frequently
the target of lawsuits.
A typical employer stock case involves a 401(k) plan that offers an
employer stock fund as an investment option, and where the employer’s
stock suffered a drop in the stock price.
It is often difficult to square an enhanced duty to investigate investments
in employer stock (i) with the fact that a fiduciary is obligated to follow
the plan terms, as established by the plan sponsor, which require
investment in company stock, or (ii) with the risk associated with
investing in a single stock, along with the fact that such investments are
encouraged by ERISA and Congress.
Defendants named in a stock drop case may include any or all of the following
Plan sponsors, administrators and named fiduciaries;
Appointing fiduciaries – board members and committees;
Fiduciary committees and their members;
Corporate officers and executives who speak to the market and/or sign
certain SEC filings the plaintiffs claim are misleading;
De-facto or functional fiduciaries; and
The plan’s trustee.
Fiduciaries acted imprudently by:
Allowing continued investment of plan assets in company stock
when stock price was artificially inflated; or
Divesting plan of company stock when stock price was low.
Fiduciaries made material misrepresentations in securities law filings (as
incorporated into plan communications) about the stock or failed to
disclose information that they knew or should have known would have
changed participants’ investment decisions regarding the employer’s
Fiduciaries’ conflicts of interest caused them to put their own interests
above those of plan participants.
Fiduciaries breached their fiduciary duties by appointing certain other
fiduciaries and/or failing to adequately monitor appointees.
Failure-to-monitor claims are generally coupled with a claim of liability as
In George v. Kraft Foods Global, Inc., 641 F.3d 786 (7th Cir.
2011), plaintiffs argued that Kraft imprudently maintained a
company stock fund as unitized, rather than converting it to a share
accounted fund. Plaintiffs argued that a unitized fund structure
caused two problems – “investment drag,” whereby the cash
portion of the fund would cause the fund’s performance to lag that
of the underlying stock, and “transactional drag,” whereby the
transaction costs incurred by the fund in connection with purchases
and sales of stock adversely impact the performance of the entire
fund rather than being allocated to the accounts of the specific
participants who initiated the transactions.
The court reversed in part the district court’s grant of summary
judgment for the defendants, remanding the case for further
consideration of certain issues of material fact as to whether
defendants breached the prudent man standard of care. The parties
settled the case in 2012 for a cash payment of $9.5 million, plus
ESOP claims in the case of non-publicly traded employer securities
generally relate to the valuation of the stock of a private company.
Major business decisions can have a substantial impact on the
value of the ESOP’s investments in the company stock.
Conducting an independent appraisal is not always sufficient to
fulfill all fiduciary obligations.
Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983).
First major decision addressing valuation of stock for
closely held ESOPs.
Fiduciaries may rely on the reports of other
professionals when discharging their responsibilities,
but must understand and approve the content of
More recently, plaintiffs have alleged that the structure of a company
stock fund was imprudent.
Defendants often invoke the distinction between fiduciary and settlor
A fiduciary must generally follow the plan’s terms.
It is not the fiduciary’s duty to try to maximize economic benefits
Presumption of prudence (the Moench presumption)
The courts are split on the issue of whether and when a fiduciary
has a duty to override plan terms relating to investments in
The seminal case is the Third Circuit’s decision in Moench v.
Robertson, 62 F.3d 553 (3rd Cir. 1995).
Moench addressed ESOP investments over which
participants had no control.
The court found that a rebuttable presumption of
prudence existed with regard to investments in
employer stock (the Moench presumption).
To overcome this presumption of prudence, plaintiffs
must show that continued investment in employer
stock was no longer consistent with settlor intent.
Moench has been adopted by the following Circuit courts:
Second Circuit: In re Citigroup ERISA Litigation,
662 F.3d 128 (2d. Cir. 2011); see also Taveras v.
UBS, 107 F.3d 436 (2nd Cir. 2013) (clarifying the
limits of the Moench presumption in the Second
Third Circuit: Reaffirmed in Edgar v. Avaya, Inc. et
al., 503 F.3d 340 (3d Cir. 2007);
Fifth Circuit: Kirschbaum v. Reliant Energy, Inc.,
526 F.3d 243 (5th Cir. 2008); Kopp v. Klein, 2013 US
App. LEXIS 13879 (5th Cir. July 9, 2013) (Moench
presumption of prudence exists at the motion to
Seventh Circuit: White v. Marshall & Ilsley Corp.,
714 F.3d 980 (7th Cir. 2013) (also apply the
presumption at the motion to dismiss stage);
Ninth Circuit: Quan v. Computer Sciences
Corporation, 623 F.3d 870m=, 882 (9th Cir.
2010)(“[I]f there is room for reasonable fiduciaries
to disagree as to whether they are bound to divest
from company stock, the abuse of discretion
standard protects the fiduciary’s decision not to
divest.”); see also Harris v. Opinion Amgen, No. 1056014, 2013 U.S. App. LEXIS 11223 (9th Cir. June
4, 2013) (clarifying the limits of the Moench
presumption in the Ninth Circuit);
The First Circuit has not adopted, but has not actually rejected,
Moench: In LaLonde v. Textron, Inc., 369 F3d 1 (1st Cir. 2004),
the court hesitated to apply a “hard-and-fast rule” and ruled
presumption inapplicable in stock-rise context.
The Sixth Circuit is the only Circuit Court to have rejected
Moench. In Dudenhoeffer v. Fifth Third Bancorp, 692 F.3d 410
(6th Cir. 2012), the court noted that the Sixth Circuit does not apply
a specific rebuttal standard. Rather, on a fully-developed record
(i.e., not before summary judgment) a plaintiff only must prove
that “a prudent fiduciary acting under similar circumstances would
have made a different investment decision.”
No fiduciary duty to trade for the benefit of plan participants if the basis of
the decision is non-public information (see, e.g., Kirschbaum 526 F. 2d at
256; Kopp, 2013 US App. LEXIS 13879) ;
Rebutting Moench and the presumption of prudence:
Eleventh Circuit: Lanfear v. Home Depot, Inc. 679
F.3d 1267 (11th Cir. 2012) (adopting the Moench
presumption and rejecting a duty to disclose nonpublic corporate information);
Key questions include the following:
Under what circumstances is it no longer prudent to purchase or
hold company stock?
When must a fiduciary override plan provisions requiring the
purchase and holding of company stock in order to satisfy the
ERISA prudence requirement?
Plaintiffs must show that allowing the company stock investment to
continue would defeat the purpose of the plan.
Courts have outlined factors which are more or less likely to overcome the
presumption of prudence
The company’s “viability as a going concern” is at
stake or the company’s stock is at risk of losing most
or all of its value.
A drastic decline in stock price coupled with
fiduciaries’ knowledge of the company’s impending
collapse or similar dire circumstances.
Fiduciaries’ knowledge of (and/or participation in)
illegal schemes affecting the price of the company’s
Factors judicially determined to be insufficient to overcome the
A temporary drop in stock price, followed by a
Substantial drops in stock price (anywhere from 40%
to 80%), absent fraud or illegal schemes.
Another decision resulting in dismissal of claims; in this case, an
independent fiduciary had been appointed to oversee the company stock
Factors in favor of overcoming the presumption:
In DiFelice v. U.S. Airways, 497 F.3d 410 (4th Cir. 2007), the court
granted the independent fiduciary’s motion to dismiss and found
that defendants did not breach their fiduciary duties in not
overriding the terms of the plan and divesting the plan of the
company stock fund prior to the company filing for bankruptcy.
The court concluded that a fiduciary’s primary duties are to offer
participants (i) a diversified range of investment options and
(ii) information about the risk-return characteristics of these
options so that each participant can construct his or her own
diversified portfolio. Since the US Airways plan fiduciaries had
done both, it was not a breach of their duties to continue to offer
US Airways stock as an investment option.
Open procedural issue under Moench after the State Street and Citigroup
decisions – at what stage of a proceeding does the Moench presumption
Moench applies at the motion to dismiss stage
Second Circuit: In re Citigroup ERISA Litig., 662
F.3d 128 (2d. Cir. 2011)
Third Circuit: Edgar v. Avaya, Inc. et al., 503
F.3d 340 (3d Cir. 2007)
Fifth Circuit: Kopp v. Klein, No. 12-10416, 2013
U.S. App. LEXIS 13879 (5th Cir. July 9, 2013);
Seventh Circuit: White v. Marshall & Ilsley Corp.,
714 F.3d 980 (7th Cir. 2013)
Eleventh Circuit: Eleventh Circuit: Lanfear v. Home
Depot, Inc. 679 F.3d 1267 (11th Cir. 2012)
Moench does not apply at the motion to dismiss stage:
In Pfiel v. State Street Bank and Trust Co., 671 F.3d 585
(6th Cir. 2012)), the Sixth Circuit overturned a decision by
the district court, holding (prior to the Sixth Circuit’s
rejection of the Moench presumption in Dudenhoeffer) that
the Moench presumption does not apply at the motion to
dismiss stage. The Court held that: (1) the plaintiffs had
alleged facts which, if true, would overcome the Moench
presumption; and (2)once sufficient facts to overcome
Moench are pled, whether defendants acted in accordance
with the prudence standard under Moench is a question of
fact that must be determined based on an established
The general rule is that communications (including communications about
employer stock held in the plan) by a fiduciary to plan participants about
the plan are subject to ERISA.
Types of communications at issue:
Formal communications (prospectuses or summary plan
descriptions) required to be disseminated by plans that offer
employer stock to their participants.
Do financial disclosures (i.e., SEC filings) that are
incorporated by reference into a summary plan
description or prospectus constitute fiduciary
Courts are divided:
SEC Filings are fiduciary
communications: Dudenhoeffer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012) (SEC filings
are fiduciary communication when they are expressly incorporated into a plan’s SPD, as opposed
to being included in required filings such as incorporation by reference into a Prospectus); In re
Sprint Corp. ERISA Litig., 388 F. Supp. 2d 1207 (D. Kansas 2004) (company financials and SEC
filings incorporated into SPDs are fiduciary communications); In re Dynegy, Inc. ERISA Litig.,
309 F. Supp. 2d 861 (S.D. Tex. 2004) (the Prospectus was alleged used as the plan’s SPD and
“in the exercise of their discretion, the [plan committee] defendants "encouraged" the plan
participants "to carefully review" Dynegy's SEC filings for "additional information relevant to
investments in the Dynegy Stock Fund"). Cf. In re WorldCom Inc. ERISA Litig., 263 F. Supp.
2d 745 (S.D.N.Y. 2003) (“ ERISA fiduciaries … cannot in violation of their fiduciary obligations
disseminate false information to plan participants, including false information contained in SEC
filings”, where the information is known to be false).
SEC filings are not fiduciary
communications: In re. GlaxoSmithKline ERISA Litig., 494 Fed. Appx. 172 (2nd Cir. 2012) (SEC
filings are not made by the employer in its capacity as a plan fiduciary, and therefore are not
actionable as misstatements under ERISA “absent allegations supporting the inference that
individual Plan administrators made "intentional or knowing misstatements . . . by incorporating
SEC filings into the SPDs”); In re Citigroup ERISA Litig., 662 F.3d 128 (2d. Cir. 2011) (the
plan’s SPD allegedly directed participants to rely on Citigroup’s SEC filings); Kirschbaum v.
Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008) (incorporation of SEC filings into SEC Form
S-8 filings and Plan Prospectuses does not make the incorporated SEC filings fiduciary
communications), ) Lanfear v. Home Depot,Inc., 679 F.3d 1267, 1283-84 (11th Cir. 2012)
(same), In re ING Groep, N.V. ERISA Litig., 749 F. Supp. 2d 1338 (N.D. Ga. 2010) (same); In re
Avon Products, Inc. ERISA Litig., 2009 U.S. Dist. LEXIS 26507 (S.D.N.Y. March 30, 2009)
(plaintiffs did not allege that any SEC filings were incorporated in plan documents); In re
Bausch & Lomb ERISA Litig., 2008 U.S. Dist. LEXIS 106269 (W.D.N.Y. Dec. 12, 2008)
(incorporation by reference of SEC filings into a SPD fulfills the requirement to provide plan
participants access to those filings made available to other potential purchasers and owners of
securities, and does not alter the fact that statements in these filings are made in a corporate and
not an ERISA fiduciary capacity).
Disclosure claims are based on the proposition that the fiduciary had an
affirmative duty to disclose certain material information related to plan
Misrepresentation claims are premised on the notion that the fiduciary
made, in a fiduciary capacity, affirmative material misrepresentations
regarding plan investments.
Informal communications (may be written or oral) about the value
or performance of the company stock.
If a fiduciary knows plan assets have been misappropriated or are
at risk for self-dealing, some courts have imposed a duty to inform
plan participants; other courts have found no duty to disclose
beyond that required by the Securities laws
Securities laws insider trading rules prohibit
selective disclosures to participants.
ERISA §514(d) prohibits ERISA from being used
“to alter, amend, modify, invalidate, impair, or
supersede” any other federal laws.
The In re Citigroup (2nd Circuit) and Home Depot
(11th Circuit) decisions also suggest that courts will
look skeptically at allegations that a fiduciary breach
has occurred as a result of not disclosing, or not
attempting to discover, non-public information.
Arguments in defense of duty to disclose claims:
Statements at issue were not fiduciary in nature.
Participants were adequately informed about the risks of
single-stock investments and the importance of diversification
through periodic communications.
Loss was not caused by reliance on allegedly misleading
Plan fiduciaries have no obligation to make selective disclosures to
plan participants ahead of the market, which disclosure would
result in the violation of insider trading laws. Making such
disclosures would cause the stock price to decline.
ERISA § 404(c) as a defense to selection of plan investment options:
Is there a duty to disclose material, adverse, non-public
information that may affect the value of the investments in the
employer stock fund?
The courts are split on this issue.
Third Circuit: In re Unisys Savings Plan Litig., 173 F.3d 145 (3d
Cir. 1999); the court held that ERISA § 404(c) can be a defense to
relieve a fiduciary of liability regarding the selection or retention
of the employer stock fund (“causal nexus” between loss and
Fourth Circuit: DiFelice v. U.S. Airways, Inc., 397 F.3d 410 (4th
Cir. 2007), in dicta, the court stated that, consistent with the DOL’s
regulations, Section 404(c) should not provide plan fiduciaries
with a defense to such claims.
Sixth Circuit: Pfiel v. State Street Bank and Trust Co., 671 F.3d
585 (6th Cir. 2012) (ERISA § 404(c) is an affirmative defense as to
which the defendant bears the burden of proof, and as such it
generally does not apply on a motion to dismiss unless the plaintiff
has addressed it in its pleadings).
Seventh Circuit: Hecker v. Deere & Co., 556 F.3d 575 (7th Cir.
2009); (while ERISA § 404(c) would not always shield a fiduciary
from the imprudent selection of funds, ERISA § 404(c) does
protect a fiduciary that satisfies its requirements and includes a
sufficient range of investment options so that the participants have
control over the risk of loss); see Howell v. Motorola, Nos.
07-3837 and 09-2796, 2011 U.S. App. LEXIS 1193 (7th Cir.
Jan 21. 2011) (applying the ERISA § 404(c) safe harbor at
summary judgment to claims relating to disclosure and monitoring,
but not to claims relating to the claims of imprudent fund
The DOL’s position is that ERISA § 404(c) does not apply to investment
selection. The basis of their position is a footnote in the preamble
to 404(c)’s regulations.
Also see the recent decision, Tussey v. ABB, Inc. 2010 U.S. Dist. LEXIS
45240 (W.D. Mo. Mar. 31, 2012). In ABB, the district court held that,
while Eighth Circuit precedent (from Jensen v. Sipco, Inc. and Anderson v.
Resolution Trust Corp) stood for the proposition that ABB could not have
breached its fiduciary duties because its disclosure complied with the
requirements of ERISA and DOL regulations, 404(c) is an affirmative
defense that must be pled and proven at trial and cannot be appropriately
resolved in a motion to dismiss.
To show fiduciary liability, plaintiffs must establish that losses to the plan
resulted from the fiduciary’s breaches of duty. ERISA § 409.
Fifth Circuit: Langbecker v. Electronic Data Systems Corp., 476
F.3d 299 (5th Cir. 2007) (rejecting the DOL’s position that ERISA
§ 404(c) could not be used as a defense, and holding that
applicability of the ERISA § 404(c) defense depends on the
particular facts and circumstances in the case).
ERISA § 409(a) requires that a fiduciary make the plan whole for any
losses suffered as a result of such fiduciary’s breaches of fiduciary duty.
Plaintiffs’ preferred damages model was promulgated in Donovan v.
Bierwirth, 754 F.2d 1049 (2d Cir. 1985), where the court held that
damages should be calculated based on the best performing alternative
DEFINED BENEFIT PLANS
Recent developments have changed the funding landscape for defined benefit
The PPA imposed heightened obligations and restrictions on companies that
maintain defined benefit plans. While Congress has given temporary funding
relief to plans, historically low interest rates in the past few years have seriously
reduced funding levels, which, in turn, has kept pressure on corporate sponsors to
The Financial Accounting Standards Board updated its pension accounting
standards to require greater disclosure related to pension expenses and funded
The significant volatility in equity markets in recent years has increased
uncertainty respecting the ability to maintain adequate funding levels.
Why Companies Contribute Employer Stock to Defined Benefit Plans:
Contributions of stock preserve cash that can be used for other corporate
purposes, including expansion or more certain compliance with financial
commitments such as bank loan covenants.
Plan sponsors, who consider their stock undervalued, view a contribution of
employer stock as an opportunity for DB plans to realize appreciation from such
Contributions of stock can reduce a plan’s funding deficiency, possibly
eliminating PPA benefit restrictions which are triggered at less than 80% and 60%
Settlor vs. Fiduciary decisions:
A corporate decision to contribute company stock to a plan is NOT a
fiduciary decision. The plan sponsor may determine in a non-fiduciary
capacity to make a contribution of employer stock to a DB plan (subject to
the plan’s acceptance of the contribution) without implicating the
fiduciary standards of ERISA.
The decision to accept the contribution must be prudent, and solely
in the interest of plan participants and beneficiaries. Where a
contribution of freely tradable stock exceeds the contribution then
owed, the fiduciary acceptance is ordinarily a straight forward
According to the DOL, even if a contribution is not prohibited
under § 406, the decision to accept a contribution can still subject
plan fiduciaries to liability for plan losses, if it can be shown that
the fiduciary breached its duty and the losses resulted from this
breach. The burden of proof on a plaintiff would be a heavy one if
the stock was freely tradable and the contribution was in excess of
a required obligation.
Plan Committee Decisions:
A decision to accept a contribution on behalf of a plan is a fiduciary
Advantages of appointment of an Independent Fiduciary
Risk mitigation. Retaining an independent fiduciary to determine
whether to accept the contribution on behalf of the plan relieves
company insiders of the fiduciary risk attendant to accepting a
contribution. Under ERISA and the Code, the penalties for
causing the plan to engage in a prohibited transaction, or for a
breach of fiduciary duty (even where the plan has not engaged in a
prohibited transaction) are significant.
Specialized experience. In-house fiduciaries may lack the
experience and specialized expertise to accept the contribution of,
and oversee the valuation of (i.e., determine the appropriate
discount for), a contribution of a large block of stock to a DB plan.
Contributions of employer securities to a DB plan require expertise
in a number of areas including, among other things, fiduciary
decision-making, familiarity with the prohibited transaction
provisions of ERISA, valuation, equity markets, and securities law.
No inside information. In many instances, company insiders
involved in plan fiduciary decision-making may come into
possession of material inside information that could impact their
decision-making. An independent fiduciary would not be privy to
such information, bolstering the fiduciary’s independence and
mitigating securities law insider trading concerns.
No conflict. Even if in-house fiduciaries possess the requisite
expertise, they may face conflicting pressures that make it more
difficult for them to act “solely in the interest” of plan participants
and beneficiaries. Even where there is no actual conflict, the mere
fact that the fiduciaries are employees may create an appearance of
Reasons to not use an Independent Fiduciary
No access to inside information. If members of the plan committee
responsible for accepting a contribution of employer stock do not
have access to material non-public information which could taint
their independent fiduciary decision-making, a company may
conclude that the plan committee is better positioned to handle the
responsibilities associated with the contribution.
Small contribution. If the contribution is sufficiently small, the
plan committee may perceive the risk attendant to accepting the
contribution as minimal.
Cost. The company or the plan committee may not wish to incur
the cost of retaining an independent fiduciary.
Fiduciary Decision-Making Process:
Efficiency. An independent fiduciary typically will have
significantly more familiarity with the mechanics of an in-kind
contribution, better enabling the company to effect a timely and
Is acceptance of the contribution by the fiduciary prudent, and in the
interests of the plan and plan participants?
The determination of whether to accept a contribution on behalf of
the plan must be prudent under ERISA § 404(a).
Where the contributed stock is freely tradable and the contribution
is incremental to the plan, the determination as to the prudence of
accepting the contribution (subject to a discount, where deemed
appropriate) is straightforward.
If the plan is being offered employer stock in lieu of a minimum
required contribution, a more careful evaluation of prudence would
be in order.
Significant factor to consider: if the contribution were rejected,
would the plan be less likely to receive a contribution because of
the financial condition of the company?
What is the appropriate discount, if any, to apply to the price of the
employer stock for purposes of the contribution?
Facts and circumstances test.
Because the plan will receive an asset that is less liquid than cash,
the valuation considers the value of the contributed employer stock
as if the contribution were converted to cash.
Hypothetical disposition. The discount analysis may consider a
hypothetical shortest timeline to liquidate the stock without
adversely affecting the market price for the stock. A number of
factors could affect this timeline.
Trading volume. The number of shares that can be
sold in the open market on a given day without
adversely impacting the market represents a fraction
of daily volume (typically 10% of trading volume).
Restrictions on resale. If the contributed stock is not
registered for resale by the plan at the time of the
contribution, the timeline would be impacted by the
registration schedule. Alternatively, the SEC
Rule 144 restrictions would apply.
The contribution agreement may contain other
restrictions on the resale of the stock (e.g., material
limitations on the size of block trades).
Gauges for appropriate discount:
Comparable secondary offerings
Hypothetical block trades
Protective put. Utilizing option pricing models,
hypothetical protective puts can be structured to
protect the plan from negative price movements
during the sale of the contributed employer stock
over the disposition timeline. The cost of this stream
of hypothetical puts is another indicator of the
appropriate discount to be applied to the
Management and Disposition of Contributed Employer Stock:
Investment management guidelines:
Established by the plan committee.
Set out the basic framework for the investment manager’s disposition of
the contributed employer stock.
Investment manager must decline to follow such guidelines if it
determines that following them would be imprudent under ERISA.
Amount contributed relative to plan assets
Anticipated plan cash needs
Views of company’s inherent value
If the plan committee believes that the employer stock has the
potential for long-term appreciation, it may prefer a long-term
holding strategy designed to capture higher expected returns.
If the plan committee determines that employer stock should not be
a core holding for the plan, it may specify a short-term disposition
Asset allocation strategy
If the plan is anticipated to have near-term liquidity needs, the plan
committee may specify a shorter investment horizon to provide a
source of cash.
Holding employer stock may or may not further that strategy.
SEC regulations: Depending on the size of the plan’s holding, the plan
may be deemed an affiliate of the employer under federal securities laws,
or may be subject to 13G filings.
Sales strategies: The plan committee may wish to restrict the ability of the
plan to sell stock through alternative means (e.g., through secondary
offerings or block trades).
The investment manager may establish price targets for selling stock. These price
targets may be set utilizing proprietary analytical tools.
The investment manager should not have access to any material inside
information regarding the company or its financial condition.
An experienced investment manager may employ any of a number of methods to dispose
of the contributed employer stock. The timing of disposition, as well the specific
methods used in a given engagement, will depend among other things on:
Time frame for disposition set forth in the investment guidelines
Size of the contribution, both as a percentage of plan assets and relative to the
company’s market capitalization
Market for the stock
Average daily volume
Stock price volatility
Any restrictions on the sale of the stock (whether by legend or by contract)
Specific disposition strategies may include:
Negotiated block sales
Rule 144 sales
Electronic crossing network sales
Open market sales
Sales to plan sponsor