Company Stock Case Outcome Favors Employer
Hat tip to attorney Janell Grenier and creator of BenefitsBlog for her nice write-up about Bunch v. W.R. Grace & Co. Savings and Investments Plan. The nature of the case differs from what some experts refer to as "stock drop cases" because plaintiffs asserted that the fiduciaries were at fault for not holding onto the stock. (In contrast, a "stock drop" case typically reflects a situation wherein (a) company stock is a defined contribution investment choice (b) the price of the company stock drops and (c) investment committee members (among others) are sued for allegedly not monitoring the "riskiness" of the company stock and its "suitability" as a 401(k) plan choice.)
Attorney Grenier describes the case as a "roadmap" for other corporate defendants who seek guidance with respect to "prudent process and procedures" they should follow in tracking company stock as a plan investment choice. Among other things, the court positively acknowledge that (excerpting from Attorney Grenier's blog):
- Appointed fiduciaries recognized a potential conflict of interest by making a decision about the prudence of the company stock as a viable investment choice.
- The plan sponsor appointed an independent fiduciary to assist.
- Financial and legal advisors were made available to assist the independent fiduciary.
- Plausible reasons for divesting company stock were documented.
- Plan participants were made aware of the sponsor's decision to remove company stock as an investment choice but also told that the situation would be monitored and that circumstances might result in a changed decision, later on.
The Court's decision, on appeal, refuted the plaintiff's assertion that market price should have been a determinant of the decision as to whether to divest or not, adding that prudent process trumps. Specifically, "(T)he test of prudence -- the Prudent Man Rule -- is one of conduct, and not a test of performance of the investment."
Not being an attorney, I would never offer legal commentary. From an economic perspective, howerver, this case is noteworthy for any plan sponsor but perhaps more so for companies that have seen stock prices plunge, forcing questions of "suitability" for a 401(k) plan.
Editor's Notes:
- One of the two independent experts "specifically cited by the First Circuit as having been hired by the investment manager to advise it" - Goodwin Procter LLP - has its own write-up about the case in its February 3, 2009 Financial Services Alert.
- Attorney Steve Rosenberg has a nice piece about the original case adjudicated in the United States District Court, District of Massachusetts. Click to read the January 30, 2008 "Findings and Rulings" in which the "Court holds that State Street and Grace did not breach their fiduciary duties when making the decision to divest the Plan of the Grace Stock Fund." Click to read "The Benefits of Relying On Investment Managers" by Stephen D. Rosenberg, February 7, 2008.
