A recent appeals court ruling may increase plan sponsors’ confidence about including and holding company stock in their retirement plans — especially those in the financial services industry.
In White v. Marshall & Ilsley No. 11-2660, (7th Cir., April 19, 2013), the presumption-of-prudence defense again was upheld when retirement-plan participant plaintiffs appealed a 2011 district-court ruling, 2011 WL 2471736 (E.D. Wis. June 21, 2011), based on this principle. That court found that the plaintiffs’ allegation of fiduciary breach by Marshall & Ilsley for offering company stock as a retirement investment option — despite its poor performance amid the 2008-2009 market collapse — couldn’t overcome the presumption of prudence, and it granted M&I Bank’s motion to dismiss the case.
M&I Bank offered its employees an individual account retirement savings plan that allowed them to choose how to distribute their savings among more than 20 investment funds with different risk and reward profiles that M&I plan fiduciaries selected. The company’s plan document described the investment options. During the housing market collapse that led to a broader stock market crash starting in late 2008, M&I’s stock price lost more than half its value. ERISA places a duty of prudence on plan fiduciaries when it comes to investment menus.
In the appeals hearing, the 7th Circuit judges sided with the defendant, citing a raft of case law opposing the idea that offering company stock as an investment option for plan participants is an ERISA violation, regardless of the stock’s market return. As the 7th Circuit judges wrote in their decision on White, “ [t]he theory also seems to be based often on the untenable premise that employers and plan fiduciaries have a fiduciary duty either to outsmart the stock market, which is groundless, or to use insider information for the benefit of employees, which would violate federal securities laws.”
The decision underscores consistent judicial support for offering company stock as a menu choice for participants’ defined contribution investing, as long as the fund is outlined in the sponsor’s plan document and is optional. With that in mind, plan sponsors need not shy from considering this option when creating or adjusting investment menus.
Finding out More
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To find out more about including company stock in retirement savings investment menus, see Section 411 in The 401(k) Handbook.