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Monday, February 6, 2012

The DOL recently filed an amicus brief in two companion “stock drop” cases on appeal to the Second Circuit Court of Appeals. In re Citigroup ERISA Litigation, 2d Cir., No. 09-3804-cv,. The DOL’s amicus brief urges the Second Circuit to reject the “presumption of prudence” first adopted in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).

In Moench, the Third Circuit ruled that an ESOP fiduciary who invests plan assets in employer securities is entitled to a “presumption” that it acted consistently with ERISA in making that decision. A challenging party may rebut that presumption, however, “by establishing that the fiduciary abused its discretion by investing in employer securities.” Id.

Over the years, Moench has been adopted by a majority of the circuits that have addressed the issue, and its presumption has been applied not only to ESOPs but also to eligible individual account plans holding employer securities, such as 401(k)s. In recent years, the DOL has begun attacking this presumption of prudence and has filed numerous amicus briefs in so-called “stock-drop” cases. The Department’s general position is that there is no support for the Moench presumption in ERISA.

In its most recent amicus brief, the DOL expressed strong support in favor of plaintiff-appellants’ petition for a panel or “en banc” rehearing of the Second Circuit’s application of the Moench presumption in the Citigroup companion cases. The majority in each case held the presumption of prudence can be overcome only where there is a “dire situation” that was objectively foreseeable. The DOL’s responded that this holding “cannot be squared with ERISA’s mandate that the fiduciary’s general obligation to follow plan documents always gives way to the overriding statutory duty to act prudently and loyally in managing the plan and its assets.”

If the DOL’s position gains favor and is adopted by an en banc Second Circuit, plan sponsors offering employer securities as an investment alternative may be held to a more stringent standard in prospective “stock drop” litigation. As a matter of general fiduciary prudence, these plan sponsors might consider revisiting their monitoring and disclosure practices now in order to ensure compliance with ERISA.

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