Stock drop cases continue to be a hot area of litigation involving 401(k) plans, ESOPs, and other forms of individual account retirement plans. Stock drop cases are typically class action lawsuits started by groups of plan participants when plan assets are invested in employer stock and there has been a substantial decline in the stock price.

In a number of Circuit Courts of Appeal, the Moench presumption of prudence is frequently used as the basis for dismissing plaintiffs’ stock drop claims that Employee Retirement Income Security Act of 1974 (ERISA) standards have been violated by plan fiduciaries. Under the Moench standard, there is a presumption that fiduciaries have not violated their ERISA fiduciary duties by allowing ongoing investments in employer stock as mandated by the terms of the plan documents, unless plaintiffs show the fiduciaries abused their discretion by continuing to invest in, or offering participants the opportunity to invest in, employer stock.

In two recent decisions (Gray v. Citigroup, Inc. 2nd Cir. 2011 and Gearren v. McGraw-Hill Cos. 2nd Cir. 2011), the Court of Appeals for the Second Circuit ruled on claims that fiduciaries acted imprudently by offering employer stock as investment options in the employers’ plans despite the employers’ exposure to risky subprime mortgages and the accompanying drop in stock value by 50 percent or more. In ruling in favor of the plan sponsor in both cases, the Second Circuit (which has jurisdiction in New York, Connecticut, and Vermont) now joins the Third, Fifth, Sixth, and Ninth Circuits in expressly adopting the Moench prudence presumption. In these two cases, employer stock was an investment option mandated by the plan, and the Second Circuit could find no abuse of discretion by the fiduciaries in continuing to offer employer stock as an investment option. The Second Circuit ruled that a fiduciary’s failure to divest the plan of employer stock would be an abuse of discretion, and would be able to rebut the Moench presumption only under circumstances that place the employer in a “dire situation that was objectively foreseeable” to the plan sponsor. A downward trend in stock price alone, even if the drop is substantial, is not sufficient to rebut the Moench presumption.