The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Georgia is representative of a common inquiry related to employer securities as a retirement plan investment option. The advisor asked:
One of my plan sponsor clients is considering offering employer stock as an investment option within his company’s qualified retirement plan. Is there guidance on whether this would be prudent or not?
Highlights of Discussion
• Many companies choose to offer their own stock as an investment option within their qualified retirement plans and, provided they follow and document a prudent process to arrive at, and continue with, that decision, they help to insulate themselves from fiduciary liability.
• Up until a few years ago, courts consistently applied what is known as the “Moench Presumption” (derived from Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)).
• The Moench Presumption held that a plan fiduciary is entitled to a presumption of prudence with respect to offering employer stock within the company’s qualified retirement plan “when plan terms require or encourage the fiduciary to invest primarily in employer stock.”
• However, over the past two decades, plan participants have challenged the Moench Presumption in court regarding plan fiduciaries’ decisions to continue allowing investment in employer stock when circumstances would seem to indicate it would be imprudent to do so.
• Several circuit courts have not been in agreement on the application of the Moench Presumption. Therefore, the U.S. Supreme Court has stepped in and will decide the issue as presented to them in Fifth Third Bancorp, et al., Petitioners v. John Dudenhoeffer, et al. (U.S. No. 12-751). The Court’s decision is expected by the end of June.
• Until further guidance is available, plan sponsors may want to contemplate the following regarding employer stock as a plan investment option:
1. Establish a clear process and document it. The process of how the decision to offer company stock occurs, and the documentation thereof, can help mitigate fiduciary liability. Who is best able to determine whether employer stock is prudent? How is the determination made? What information do the fiduciaries look at? The process should be addressed in the Investment Policy Statement.
2. Carefully design the plan. The governing plan document must specify if and how the employer stock will be offered (e.g., any limits, which contribution types are permitted or mandated, diversification rules, the process identified in #1 above, etc.).
3. Consider an outside independent fiduciary who will evaluate the company stock, monitor its continued performance and make recommendations to the plan’s trustee or investment committee. This provides an added, documented buffer for in-house plan fiduciaries.
4. Be diligent about the ongoing monitoring of company stock. Company stock is more volatile than other types of investments. Clearly document the monitoring process and what information is looked at.
5. Review participant notices and communication. There are strict rules regarding what information participants must receive regarding employer stock and how the offering of employer stock is addressed in participant communication pieces. Carefully written disclosures are critical in order to avoid misrepresentations.
6. Document, document, document.
Conclusion
Plan fiduciaries can be held personally liable for plan losses that result from a breach of their duties. The decision to offer employer stock as a plan investment, and to continue to do so on an ongoing basis, must be based on ERISA fiduciary standards. Defining and documenting the decision-making process can help plan fiduciaries mitigate their liability.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
