The U.S. Supreme Court announced yesterday that it will not review a decision of the
U.S. Court of Appeals for the Sixth Circuit on the extent to which
Section 404(c) of the Employee Retirement Income Security Act shields plan
fiduciaries from claims of imprudent investment in employer stock See State Street Bank and Trust Co. v. Pfeil, U.S., No.
12-256, cert. denied 12/3/12. Earlier this year, the Sixth Circuit held that, while the Section 401(k)
plan participants pleaded sufficient facts to overcome the “presumption of
prudence” (frequently called the "Moench" presumption) that attaches to plans that invest in employer stock, the lower court
erred in applying the presumption at the motion-to-dismiss stage. According to the Sixth
Circuit, plan fiduciaries cannot escape their duty of prudent investing by
asserting at the pleadings stage that any losses plan participants suffered were
caused by the participants' decisions to continue investing in employer stock, asserting that “[s]uch a rule would improperly shift the duty of prudence to monitor the menu of
plan investments to plan participants” and would place an “unreasonable burden”
on “unsophisticated” participants.
By way of background, in 2009, two General Motors Corp. employees filed a proposed class
action alleging that State Street Bank and Trust Co. breached its fiduciaries
duties by waiting too long to divest GM's Section 401(k) plans of their holdings
in GM stock. The U.S. District Court
for the Eastern District of Michigan dismissed the employees' complaint and
found that, although they were likely to overcome the “presumption of prudence”
that attaches to plans that invest in employer stock, they would be unable to
show that State Street caused their investment losses, because the employees
retained ultimate control over their investment selections. On appeal, the Sixth Circuit reversed, finding that the district
court erred in applying the presumption of prudence at the motion to dismiss
stage. The presumption, the appellate court said, was an evidentiary
presumption, rather than an additional pleading requirement. The Sixth Circuit
also found that the employees plausibly pleaded a causal connection between
State Street's alleged breach and the plan losses. In so finding, the appeals
court said the district court erroneously relied on the fact that the plaintiffs
could divest their plan accounts of the GM stock to find that State Street's
alleged breach did not cause plan losses.
In its petition for review, State
Street framed the issue to the Supreme Court as whether ERISA Section 404(c) provides fiduciaries
of otherwise-qualified plans a defense to liability against an imprudent
investment claim when the participant's control over the investment is the
proximate cause for the loss. It also asked the Court to consider a second
question—whether liability under ERISA Section 409(a) for a breach of fiduciary
duty claim requires that the breach constitute the proximate cause of the
loss. In response to State Street's petition, the employees challenged whether a circuit split existed with
respect to ERISA Section 404(c), saying that “[a]ny such circuit split, however,
has no bearing on the Sixth Circuit's holding in the case because the Sixth
Circuit held that 404(c) is a fact-intensive affirmative defense that the
district court improperly applied on a motion to dismiss, an issue on which the
courts of appeals unanimously agree.” The employees argued that State Street, as
an ERISA fiduciary, “cannot breach its duty and then escape liability as a
matter of law on 404(c) or causation grounds when the exact risk State Street
was supposed to protect against materializes to harm the plans.” The employees also asserted that State Street's petition did not
seek review of the case's “key holding,” which they contended was the holding
that “GM plan participants had alleged sufficient facts to overcome the
presumption of prudence,” and instead sought review of only two “narrow
issues.”
