On July 24, 2012, AARP, NELA and the Pension Rights Center filed an amicus curiae brief urging the U.S. Supreme Court to grant a petition for certiorari in Gray v. Citigroup, Inc. (No. 11-1531). In a ruling that abrogates ERISA’s primary purposes, the Second Circuit held that fiduciaries responsible for investment of retirement plan assets are relieved of ERISA’s prudent person standard of care if the employer plan sponsor inserts into the plan document a provision that mandates the investment in or offering of that employer’s own securities, except where the company is in a dire financial situation or facing bankruptcy. This decision misapplies the common law of trusts, ignores the Department of Labor’s long-standing interpretations and guidance, and places at risk billions of dollars of retirement savings of employees and their families.
In this case, plaintiffs, who were Citigroup employees whose 401(k) accounts (and retirement benefits) were drastically slashed because they had invested in Citigroup stock, claimed that the plan fiduciaries breached their duty to the participants by continuing to maintain Citigroup stock as an investment option in the plan after it became imprudent to do so. If the standard adopted by the Second Circuit had been applied in ERISA class actions on behalf of workers at Enron, Worldcom, and other major failed corporations, even the modest recoveries in those cases would not have been possible.
Addressing one of the traditional reasons why the Supreme Court might grant a petition of certiorari, our amicus brief focuses on the magnitude of the problem presented by the Second Circuit’s decision in this case. We note that defined contribution plans, including 401(k) plans like the Citigroup plan, have become the primary vehicle after Social Security for providing retirement income in America, encompassing millions of participants in plans offering their employers’ stock and accounting for billions of dollars held as plan assets. Because large employers are more likely to offer employer stock as an investment option, substantial numbers of participants are exposed to the risks of holding employer stock. According to data cited in our brief, the aggregate dollar amount of employer stock in retirement plans was approximately $166 billion as of 2009.
In addition, our brief describes and analyzes research in behavioral economics, which reveals that investors such as plan participants are unaware of the risk of investing in a single company’s stock, do not understand how to set up and implement a rational investment plan for retirement, and believe the mere offering of employer stock as an option is an endorsement of the stock, which causes the employees to choose to invest more in the employer stock. Given ERISA’s statutory exemption of employer stock plans from the generally applicable rule requiring diversification, the behavioral economics studies cited in our brief underscore the need to enforce ERISA’s statutory requirements that fiduciaries be held to their duties of loyalty and prudence.
Finally, we note the huge losses suffered by employees and retirees of companies such as Enron, WorldCom, and Countrywide Financial by way of illustrating what is at stake from following the Second Circuit’s decision. As our brief states, “[b]y the time a company is in bankruptcy or in a dire financial situation [as required to support a claim under the Second Circuit’s standard], the amount of money that can be recovered for breaches of fiduciary duty for the plan is a small fraction of the losses.”
We thank NELA member Mary Ellen Signorille and Jay Sushelsky of AARP Foundation Litigation for writing and preparing the brief. To read our Supreme Court amicus brief, please click here. NELA participated as amicus curiae before the Second Circuit and you may read that brief here.
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