One of the more interesting “stock drop” decisions in the last year, now on appeal to the Second Circuit, is In re Citigroup ERISA Litig., No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009), dismissing claims based on a financial services company’s exposure to subprime mortgages and other alleged credit risks. Filed in the Southern District of New York by participants in the company’s 401(k) plans, the Citigroup suit alleged that plan fiduciaries breached their fiduciary duties by offering the sponsor’s own stock as a plan investment option where defendants knew or should have known that it was an imprudent investment. Indeed, in the wake of the housing market collapse and ensuing credit crisis, the company stock fund allegedly lost over 50% of its value.
The plaintiffs’ claims turned on whether the defendants were acting as fiduciaries with respect to the challenged conduct – i.e., whether they had discretionary authority over the selection of the company stock fund as an investment option under the plans. The district court dismissed the complaint, finding that the defendants had no discretion whatsoever to eliminate the company stock fund as a plan option, and therefore could not have been acting as fiduciaries. Id. at *8. In reaching this conclusion, the court relied upon the fact that the language of the plan documents at issue “unequivocally required that company stock be offered as an investment option” – i.e., that it was hard-wired into the plan – and thus afforded plan administrators no discretion to remove the fund.
Noting that an ERISA fiduciary must act in accordance with the documents and instruments governing the plan, provided that they are consistent with ERISA, the court also rejected the plaintiffs’ argument that the defendants had a fiduciary obligation to override the plan’s mandate that the stock be offered as an investment option. The court recognized that a plan provision requiring that employer stock be offered as an investment option is fully in line with Congress’s goal of encouraging stock ownership, and any contention that ERISA required defendants to override explicit plan documents was at odds with this statutory preference. Further, the court acknowledged that the plaintiffs’ interpretation of ERISA would put plan fiduciaries “in a confusing, untenable position” by subjecting them to liability for violating plan terms by divesting plans of company stock, particularly because company stock could subsequently increase in value after divestiture. The court ruled that ERISA’s fiduciary prudence provisions do not require this Hobson’s choice.
The Citigroup decision is significant because it indicates that where a plan document is hard-wired to require investment in company stock, the administrator is divested of any fiduciary responsibility with respect to the continued offering of that option investment, even in the face of investment losses. Other courts have also recognized the congressional preference for holding employer stock in ERISA plans.
Citigroup is currently on appeal to the Second Circuit, Case No. 09-3804-cv, and on December 28, 2009 the Department of Labor (“DOL”) filed an amicus brief in support of appellant requesting reversal. In its brief, the DOL argues that the district court decision essentially grants “judicial immunity” to fiduciaries for alleged breaches of duty, and that, if upheld, the decision would effectively bar most suits against fiduciaries with regard to plan investments in company stock. It is the DOL’s view that “statutory duties override plan terms inconsistent with [ERISA’s fiduciary provisions].” The AARP and the National Employment Lawyers Association have also filed amicus briefs supporting reversal, and briefing in the matter is expected to be completed in April 2010.