Alert March 29, 2012

Sixth Circuit Holds Safe Harbor Defense Does Not Apply to Selection of Investment Funds, and Moench Presumption Does Not Apply at Pleadings Stage

The U.S. Court of Appeals for the Sixth Circuit held that the presumption of prudence for the holding of employer stock in a retirement plan (the “Moench presumption”) does not apply at the pleadings stage. It also held that ERISA’s safe harbor defense for losses caused by a participant’s exercise of control does not apply to the selection of investments a plan offers. The decision, Pfeil v. State Street Bank and Trust Company, No. 10-2302 (6th Cir. Feb. 22, 2012), is available here.

Pfeil involved two 401(k) plans sponsored by General Motors Co. (the “Company”), each of which allowed participants to invest in a fund comprised of Company stock. According to the court’s decision, the plan documents directed the bank trustee to divest the plans’ holdings of Company stock if it “determines from reliable public information that (A) there is a serious question concerning [the Company’s] short-term viability as a going concern without resort to bankruptcy proceedings; or (B) there is no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings.”  After various public disclosures by the Company in 2008, the trustee suspended purchases of Company stock. The participants sued under ERISA because, allegedly, the trustee did not divest the plans’ Company stock holdings until the following year. The district court dismissed the complaint. It held that while the complaint pleaded sufficient facts to overcome the presumption of prudence in holding Company stock, the complaint failed to demonstrate that the trustee’s actions caused any losses to the plans given that participants remained free to move their plan holdings to investments other than the Company stock fund at any time.

The Sixth Circuit began its opinion by holding that the Moench presumption “is not an additional pleading requirement and thus does not apply at the motion to dismiss stage,” even though the court noted that it was not necessary to decide that question to rule on the appeal. The court nonetheless held that the presumption was an evidentiary one. The court recognized that other circuits, most notably the Second and Third, take a different approach and apply the presumption at the pleading stage – with the Second Circuit in its recent Citigroup decision (reported in the December 2011 ERISA Litigation Update) holding that the presumption was not simply an evidentiary one. The Sixth Circuit explained that under its articulation of the Moench presumption, the evidence required to rebut the presumption is broader than the evidence needed to rebut the presumption in other circuits. Given this difference, the court held that it was not appropriate to apply the presumption at the pleadings stage in its circuit.

The court then reversed the lower court’s holding as to causation. The Sixth Circuit held that a “fiduciary cannot avoid liability for offering imprudent investments merely by including them alongside a larger menu of prudent investment options.”  It went on to address ERISA’s safe harbor provision, Section 404(c), which provides that a fiduciary shall not be liable for losses that result from a participant’s exercise of control. The court held that the defense (i) was not applicable at the pleadings unless the plaintiff anticipates the defense and addresses it in the pleadings, and (ii) “does not relieve fiduciaries of the responsibility to screen investments.”  In this later holding, the court followed the decision last year of the Seventh Circuit (reported in the March 2011 ERISA Litigation Update) and the view of the Department of Labor that Section 404(c) “does not serve to relieve a fiduciary from its duty to prudently select and monitor any service provider or designated investment alternative offered under the plan.”