No Presumption of Prudence if Stock Fund Not Required

March 13, 2013 ( – A federal appellate court has refused to apply the presumption of prudence standard to fiduciaries of a retirement plan that does not require investments in company stock.

The 2nd U.S. Circuit Court of Appeals said a district court erred in applying the presumption of prudence as to one of two plans offered by UBS AG and UBS Financial, for which former participants allege fiduciaries violated their fiduciary duties by continuing to offer company stock as an investment choice. The appellate court found the Savings and Investment Plan (SIP) neither requires nor strongly encourages investment in UBS stock or the UBS Stock Fund.    

The 2nd Circuit held, however, that the District Court correctly applied the presumption of prudence as to the second plan—the Plus Plan—which requires plan fiduciaries to invest in the UBS Stock Fund.   

The appellate court pointed out that the Moench presumption dictates that, where applicable, a fiduciary’s decision to invest an employer’s retirement plan in the employer’s own stock—or to offer plan participants the option to so invest—is a presumptively prudent decision in compliance with the Employee Retirement Income Security Act (ERISA), and thus the decision to invest in the employer’s stock is reviewed only for an abuse of discretion (see “Case Sensitive: ‘Moench’ Mete?”). An ERISA fiduciary appropriately may be found to have exceeded this discretion only where he knew or should have known that the employer, and therefore its stock, was in a “dire situation.”

However, the 2nd Circuit has stated in other cases that it is not merely investment in employer stock that entitles a defendant to a presumption of prudence.Rather, “judicial scrutiny should increase with the degree of discretion a plan gives its fiduciaries to invest.Thus, a fiduciary’s failure to divest from company stock is less likely to constitute an abuse of discretion if the plan’s terms require—rather than merely permit—investment in company stock.”The appellate court said this is in accordance with Moench, which indicates presumption does not apply where the fiduciary is “simply permitted to make” investments in an employer’s securities, but only where “the fiduciary presumptively is required to invest in employer securities.”  

According to the court’s opinion, the Plus Plan’s plan document states that the “purpose” of the plan is to “attract and retain qualified individuals by providing them with an opportunity to accumulate assets for their retirement and to acquire [UBS] Common Stock.” Section 2111.2(a) of the same document states that “[t]he Trustee shall invest and reinvest all amounts in each Participant’s Accounts ... from among the Investment Funds made available by the Investment Committee ... one of which shall be the [UBS] Common Stock Fund.”The 2nd Circuit agreed with the District Court, which held, “[b]ecause the Plus Plan [Plan Document] clearly and explicitly limits the Trustee’s discretion by requiring that the UBS Stock Fund be offered as an investment option, the Plus Plan fiduciaries are entitled to a presumption of prudence.”  

The court noted in its opinion that unlike the Plus Plan, the SIP Plan Document contains no language mandating that the UBS Stock Fund “shall” be offered as an option to investors in the plan.Although the SIP Plan document does include several mentions of the UBS Stock Fund, it clearly establishes that the UBS Stock Fund was to be treated no differently from any other investment fund that the SIP Investment Committee elected to offer to participants.Thus, the SIP fiduciaries should not benefit from an especial presumption that they behaved prudently merely by offering it to plan participants, the appellate court concluded.    

Both the SIP and the Plus Plan sustained significant losses due to individual plan participants’ accounts’ investment in the UBS Stock Fund, as UBS stock fell 74% between April 26, 2007, and October 16, 2008.  

The opinion in Taveras v. UBS AG is here.