Labor Secretary Hilda Solis Files Amicus Brief in Citicorp Case

Labor Secretary Hilda Solis has filed an amicus brief in a controversial case involving company stock in Citigroup's 401(k) plan. In In re Citigroup ERISA Litigation, No. 07 Civ. 9790 (S.D.N.Y., Aug. 31, 2009), a district court ruled that fiduciaries of the company's 401(k) plan had no obligation to permanently or temporarily remove Citigroup stock as an investment option because the plan documents made its availability mandatory. Judge Sidney Stein concluded that stock in an eligible individual account plan or ESOP was "not intended to guarantee retirement income but to encourage employee ownership." That is by far the broadest reading of ERISA on company stock yet. Courts usually have relied on some standard of prudence, varying with whether the plan was actually an ESOP whether it mandated employer stock be in the plan. Fiduciaries, Judge Stein argued, also cannot be expected to anticipate stock movements and protect employees against significant drops. Citigroup's stock fell about 50% from its high to its low, but the court ruled that its viability as a going concern (the only basis for fiduciary action) was not in question. The court also relied on the Moench presumption, which argues that fiduciaries should remove stock from a plan only if they "know or should have known" that the company was in imminent danger of collapse.

The DOL brief makes four key points:

• Nothing in ERISA overrides the duty of fiduciaries to act prudently with regard to all investments. Even if company stock is mandated as an investment option or part of a plan's assets, the fiduciaries cannot be per se exempted from any prudence requirements at all.
• The plan here required that stock be held in the plan as an option, but did not require fiduciaries to buy it. If the stock was, as alleged, purchased at a price the fiduciaries knew was inflated given Citicorp's situation (knowledge they may have had that the public did not), then ERISA would be violated by their purchasing shares.
• The Moench presumption is an inappropriate standard. According to the brief: "As an initial matter, this Court, which has neither considered nor adopted Moench, ought not adopt any presumption of prudence with regard to investment in employer stock." The brief goes on to contend that plans can avoid the requirement for diversification under ERISA in properly drafted 401(k) plans or ESOPs, but they cannot rely on this to hold or buy company stock even when it is imprudent to do so. "Moreover," the brief went on, "whatever its utility in other situations, there is no rationale for applying the Moench presumption where, as here, the fiduciaries allegedly knew or should have known that the stock was artificially overpriced. It is always imprudent for ERISA fiduciaries to knowingly overpay for stock and they are not entitled to any contrary presumption." The language on "whatever its utility" in reference to Moench may seem to be taking a more measured stance, but the rest of the brief takes a tougher one.
• Fiduciaries should disclose information needed for participants to make intelligent decisions. Fiduciaries should "not hide behind their corporate roles to evade this duty with impunity and mislead participants."

Note that the brief concerns only the district court's dismissal of the plaintiff's case; it does not argue that the plaintiffs were right. The standards for dismissal are more stringent than for a final ruling. If the courts ultimately approve the district court's ruling, it would give fiduciaries far greater leeway to hold and buy company stock; if the DOL view prevails, existing standards would be considerably tightened. A link to the brief can be found at this link (PDF format).