Many appellate courts have ruled that fiduciaries who allow plan investment in employer stock are entitled to deferential judicial review or a “presumption of prudence” when the plan document requires or encourages the offering of employer stock as an investment option. But a new Second Circuit decision demonstrates that references to an employer stock fund in the plan document may not sufficiently “encourage” that option to give rise to the presumption. Taveras v. UBS AG, No. 12-1662 (2d Cir. Feb. 27, 2013).
The price of UBS stock fell 74 percent in 2007-08. At the time, both the UBS Financial Services 401(k) Plus Plan (Plus Plan) and the UBS Savings and Investment Plan (SIP) allowed participants to invest in funds holding UBS stock. Participants brought stock drop claims alleging that defendants breached fiduciary duties by allowing the plans to invest in UBS stock. The district court concluded that the allegations failed to overcome the presumption of prudence and dismissed the claims against the alleged fiduciaries of both plans.
After examining the two plan documents, the Second Circuit held that, although fiduciaries of the Plus Plan were entitled to the presumption, the fiduciaries of the SIP were not. As a result, the court affirmed the dismissal of the Plus Plan claims, but reversed the dismissal of claims against the SIP fiduciaries.
The Plus Plan’s plan document stated that the trustee shall invest in investment funds made available by the plan’s investment committee, “one of which shall be the [UBS] Common Stock Fund.” The Second Circuit agreed that this instruction entitled the Plus Plan fiduciaries to a presumption of prudence in allowing plan investment in the fund holding UBS stock, and held that the plaintiffs’ allegations did not overcome that presumption.
But the SIP’s plan document did not specify that the investment options must include a fund invested in UBS stock. To be sure, the plan document contained provisions that contemplated the inclusion of the employer stock fund. One provision defined the “UBS Stock Fund” to refer to the portion of the plan invested in UBS stock. Other provisions addressed how dividends from the UBS Stock Fund would be reinvested and how voting rights in UBS stock would be administered. Defendants argued that these provisions showed the expected inclusion of the employer stock fund among the SIP’s investment options.
The Second Circuit held that such provisions were not enough to require or even “encourage” inclusion of the employer stock fund. The Court held that provisions concerning dividends and voting rights “are relevant only if the Investment Committee has already made the entirely discretionary decision to add the [employer stock] fund as an option in the first instance.” In the court’s view, unlike the fiduciaries of the Plus Plan, the fiduciaries of the SIP were under no obligation to make UBS stock available for investment and were thus entitled to no presumption.
This decision demonstrates that the presumption of prudence for employer stock funds cannot be taken for granted. Plan sponsors are well advised to review their plan document to ensure that the settlor’s intention that an employer stock fund be made available to plan participants is clearly stated.