A recent Fifth Circuit case found that a strong presumption of prudence exists when retirement plan fiduciaries follow plan terms that mandate the purchase of company stock.

In this class action, the plaintiffs were participants in an eligible individual account plan with portions of their accounts invested in the company stock fund. The plan’s sponsor, in its “settlor” capacity, required under the plan’s terms that the company stock fund be an investment option under the plan and that any employer matching contributions be allocated to the fund (only individuals over 55 with ten years of service could divest their matching contributions out of the company stock fund).  Plaintiffs claimed that plan fiduciaries had a duty to stop purchasing the company stock, liquidate the investments in the company stock fund and terminate such fund when the fiduciaries learned that the company stock was artificially inflated due to certain sham “round trip” energy trades that occurred between 1999 and 2001.  These “round trip” trades resulted in a 10% overstatement of revenues. This overstatement was disclosed by the company and over the course of one week, the stock price dropped from $24.60 to $14.50.  This price drop caused significant decline in the value of the company stock fund and plaintiffs sued to recover the resulting losses.

The Fifth Circuit affirmed the district court’s grant of summary judgment for the defendants finding that ERISA does not require a fiduciary to disobey plan terms mandating investment in employer stock.  Rather, as the court stated, fiduciaries are presumed to act prudently when following required plan terms where there is no discretion to do differently—to override the plan provisions would require the plaintiffs to show “circumstances not known to the settlor and not anticipated by him” that would cause an investment to “defeat or substantially impair the accomplishment of the purposes of the trust.”  The court found that the plaintiff must present “persuasive and analytically rigorous facts” to overcome the “heavy burden” needed to rebut this presumption of prudence. 

This case provides an interesting commentary on how limiting the discretion given to fiduciaries to remove company stock may provide the plan fiduciaries with a stronger defense in these “stock drop” cases where plaintiffs allege that the fiduciaries had a duty to remove company stock as a plan investment vehicle.  Since the sponsor’s decision to design the plan to mandate a company stock fund is a settlor function, the fiduciaries’ duty to override the prescribed plan terms could be limited, at least in the Fifth Circuit, to situations where there is an indication that the company’s viability as a going concern is threatened or the company stock is in danger of becoming essentially worthless.