New Developments in the Presumption of Prudence Under ERISA: A Dramatic Increase in Liability Exposure Hangs on the Difference Between "Shall" and "May"


Recent decisions out of the Second and Ninth Circuits have increased the liability exposure of plan fiduciaries under the Employee Retirement Income Security Act (ERISA) where the retirement plan gives employees an option to invest in the employer’s stock. If the plan permits, but does not require, that this investment option be available, plan fiduciaries can be held liable if they fail to withdraw the option once they become aware, or should be aware, that the value of the employer’s stock may be artificially inflated.

ERISA pulls in potentially conflicting directions. On the one hand, the statute was enacted to “assure the equitable character” and “financial soundness” of employee retirement plans. Moench v. Robertson, 62 F.3d 553, 560 (3d Cir. 1995) (internal quotation marks and alterations omitted). To achieve that end, ERISA mandates that a retirement plan name one or more fiduciaries to manage the assets “solely in the interests of the participants and beneficiaries” (known as the duty of loyalty) and “with the care, skill, prudence and diligence” of a “prudent man” in “the conduct of an enterprise of a like character with like aims” (known as the duty of care). 29 U.S.C. § 1104(a)(1). On the other hand, ERISA allows the employer to establish an Employee Stock Ownership Plan (ESOP), designed to invest primarily in the employer’s own stock, which necessarily restricts the investment choices of plan fiduciaries without relieving them of these two stringent duties. The Third Circuit resolved this tension in its groundbreaking decision in Moench by holding that “an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision.” 62 F.3d at 571.

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