Skip to content

Court Limits Protections Where Retirement Plans Require Investment in Employer Securities

A federal appeals court ruled that when challenging the decision to invest a 401(k) plan primarily in employer's securities, plaintiffs must overcome a presumption that the investment was prudent.    


The case was consolidated as a class action in 2007 after 13 lawsuits were brought against  Citigroup  and its top officials alleging they had breached their fiduciary duties by continuing to offer  Citigroup  stock as an investment option during a period when the company was facing tremendous financial losses because of the subprime mortgage crisis.
According to the employees' complaint,  Citigroup  had invested extensively in subprime mortgages and securities related to subprime mortgages in the mid-2000s. When the subprime mortgage market collapsed,  Citigroup  lost tens of billions of dollars in its subprime mortgage-related investments, and Citigroup's stock lost more than half of its value during the period at issue. The employees alleged that  Citigroup  and its officials knew that the company would sustain heavy losses from the subprime mortgage investments but failed to tell the employees about the company's immense subprime loan loss exposure. During the class period of January 1, 2007, to January 15, 2008, Citigroup's 401(k) pension plans held over $2 billion worth of  Citigroup  stock.

In August 2009, the district court issued an opinion and order dismissing all allegations in the complaint. Relying on the "Moench" presumption, which finds that the offering of employer stock in a 401(k) plan as an investment option is presumptively prudent, the district court held that the presumption applies at the pleadings stage and had not been overcome. The district court reasoned that the allegations concerning Citigroup's subprime investments did not result in the type of dire situation that would have caused the defendants to change its offering of the employer stock as an investment option.
AARP's "friend of the court" brief filed by AARP Foundation Litigation attorneys argued the district court erred by refusing to read the statute as written. At least one entity must be a fiduciary and have responsibility regarding plan investments.

In considering the appeal, the Second Circuit joined the Third, Fifth, Sixth and Ninth Circuits in adopting a presumption of prudence regarding the decision of a fiduciary of a 401(k) plan to include and keep employer securities as an investment option in 401(k) plans. The court held that the fiduciary's actions in allowing participants to continue to invest in the fund after a significant drop in price should be reviewed using an abuse of discretion standard. Plaintiffs failed to rebut the presumption of prudence because they could not show that the defendants knew or should have known that Citigroup was in a "dire situation." The dissent argued that the presumption of prudence is "fundamentally unsound."

What's at Stake

Employees who invest in their employer's securities in a 401(k) plan may not have any recourse against the plan if the stock price plummets unless their employer is in "a dire situation," by which time it may be too late for any recovery.
Case Status

In re: Citigroup ERISA Litigation was decided by the U.S. Court of Appeals for the Second Circuit.