DoL Urges Reversal in Stock Drop Case

In an amicus brief, the U.S. Department of Labor asked the 9th U.S. Circuit Court of Appeals to reverse a federal district court’s dismissal of a 401(k) stock-drop suit.

The case was against State Street Bank and Trust filed by General Motors 401(k) participants. The DoL contends the district court was right in finding that plaintiffs alleged sufficient facts to state a claim for fiduciary breach and to rebut the presumption of prudence that attaches to employer stock investments; however, it was wrong in dismissing the suit after concluding that State Street did not cause losses to the plaintiffs’ accounts because the employees still had control over their investment selections (see “State Street Stock Drop Suit Gets Tossed“).  

According to the brief, the district court erred in concluding that, regardless of how a prudent fiduciary would act under the circumstances, State Street was bound to follow the requirement in its contract with GM that it continue to offer the GM stock Fund unless “there is a serious question concerning the Company’s short-term viability as a going concern” or “no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings.” “Prudence is defined by the statue and does not mean, as State Street argues, what ‘the plan’s drafters would have intended.’ Moreover, ERISA section 404(a)(1)(D) forbids fiduciaries from contracting out of the statutory prudent man standard,” DoL attorneys wrote. 

They argued that if the district court were correct that Employee Retirement Income Security Act (ERISA) fiduciaries are absolved of liability for any resulting losses simply because a 401(k) plan provides, as most do, that the plan participants and beneficiaries may allocate the assets in their individual accounts among different plan investments, then most fiduciaries to such plans would never be liable for losses stemming from lapses of their duties. “Such a holding would immunize even egregious fiduciary misconduct for most 401(k) plans,” the brief contends.  

Finally, the DoL pointed out that the defendants did not assert, let alone prove the plans' compliance with the standards set forth in ERISA Section 404(c).  

The agency added that even if these are 404(c) plans, section 404(c) only shields fiduciaries from losses "which result[] from" the participant's exercise of control and not from losses caused by their own fiduciary misconduct; Section 404(c) does not give fiduciaries a defense for their own imprudence in the selection or monitoring of investment options available under the plan.   

Quoting another court case, the brief stated: "[T]he selection of plan investment options and the decision to continue offering a particular investment vehicle are acts to which fiduciary duties attach, and that the [404(c)] safe harbor is not available."   

The brief is here.