7th Circuit Applies Presumption of Prudence to Marshall & Ilsley

The 7th U.S. Circuit Court of Appeals determined Marshall & Ilsley was entitled to a presumption of prudence for holding company stock in its retirement plan.

Despite the Secretary of Labor weighing in with an amicus brief regarding the proper legal standard in such cases, focusing in particular on the presumption of prudence that courts have used, the appellate court agreed with a district court ruling that the plan fiduciaries benefit from a presumption of prudence and that the plaintiffs’ allegations do not overcome that presumption.   

The court noted in its opinion that the theory—that the employer and plan fiduciaries violated their duty of prudence under the Employee Retirement Income Security Act (ERISA) by continuing to offer employer stock as an investment option—would require the employer and plan fiduciaries, in this case and many similar cases, to violate the retirement plan’s governing documents, which employers and plan fiduciaries are also required to follow under ERISA. “The 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 court wrote.  

The 7th Circuit argued that if the fiduciaries had done the opposite—removed the fund when M&I’s stock price was low—the plaintiffs could have claimed that the same fiduciaries were liable for the gains employees missed when M&I’s stock price subsequently increased. In that case, the claim would be that the fiduciaries violated the plan’s governing documents by removing the M&I Stock Fund as an investment option.

The court noted that after M&I stock reached its lowest point in the proposed class period, it increased in value by more than 150% by the end of the class period—from an adjusted low price of $8.46 to an adjusted price of $21.43—a gain that was generally in line with the broader market recovery. If the fiduciaries had chosen to violate the terms of the plan and had forced a sale of employees’ M&I stock at the lowest point, the employees would have lost out on the later increase in value and would seem to have had viable claims under ERISA for the fiduciaries’ failure to comply with the terms of the plan document.  

The court pointed out that beginning with Moench v. Robertson in the 3rd U.S. Circuit Court of Appeals, and continuing in many cases that followed, federal courts have tempered the risk of liability for fiduciaries in these circumstances by applying a presumption that the fiduciaries acted prudently (see “High Court Lets Stand Presumption of Prudence Decisions”). In addition, the courts have agreed that plaintiffs in such cases must allege and ultimately prove that the company faced “impending collapse” or “dire circumstances” that could not have been foreseen by the founder of the plan (see “Avaya Wins Appeal in Stock Drop Case”). “A significant decline in stock price is not enough, unless perhaps it is combined with other evidence of impending collapse, mismanagement, or internal conflicts of interest,” the 7th Circuit wrote.  

According to the opinion, Marshall & Ilsley Corporation offered its employees an individual account retirement savings plan that allowed employees to choose how to distribute their savings among more than 20 investment funds with different risk and reward profiles. One of the investment options in the plan was the M&I Stock Fund. During the housing market collapse and subsequent market crash in 2008 and 2009, M&I’s stock price dropped by approximately 54%, as did the value of employees’ investments in the M&I Stock Fund.  

The opinion in White v. Marshall & Ilsley Corporation is here.