The U.S. Department of Labor recently argued that a three-judge panel of the Ninth Circuit got it wrong when it adopted the "Moench presumption" for assessing whether fiduciaries invested imprudently in employer stock in Quan v. Computer Sciences Corp., _ F.3d _, 2010 WL 3784702 (9th Cir. Sep. 30, 2010).

The presumption, first articulated by the Third Circuit in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995), is that fiduciaries of retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) act consistently with ERISA when they invest plan assets in employer stock. The Moench presumption thus makes it more difficult for a plaintiff to prevail in a lawsuit against a plan fiduciary based on claims that the fiduciary acted imprudently when it offered employer stock as an investment option in a 401(k) plan.

Despite previously declining to do so, the Ninth Circuit joined the Fifth and Sixth Circuits in adopting the presumption.

In an amicus brief supporting the petition for en banc rehearing of the panel's decision, filed on November 1, 2010, the DOL argued that the panel erroneously replaced ERISA's objective "prudence" standard with a "more lenient, judicially created standard." The DOL argued that by supplanting the statutory "prudent man" standard with an "abuse of discretion" or "intermediate prudence" standard, the Quan panel improperly held that plan fiduciaries may make or hold plan investments in employer stock even in circumstances where a prudent fiduciary would not do so, as long as the "company's viability" is not implicated.

Under the panel's ruling, the DOL argued, a fiduciary may continue to allow a retirement plan to invest in employer stock no matter the circumstances, so long as there is not "a precipitous decline in the employer's stock combined with evidence that a company is on the brink of collapse or is undergoing serious mismanagement." The DOL argued that this cannot be squared with the traditional, high standard of prudence set forth in ERISA. The DOL also argued that the panel’s decision should be overturned because it was an unjustified creation of common law that contradicted ERISA's plain statutory language, its purpose, and U.S. Supreme Court and Ninth Circuit precedent.

Section 404(a)(1) of ERISA imposes a duty on plan fiduciaries to invest plan assets as a "prudent man" would do. Although ERISA ordinarily requires a fiduciary to act prudently by "diversifying the investments of the plan so as to minimize the risk of large losses," Section 402(a)(2) of the statute exempts "acquisition or holding of qualifying employer real property or qualifying employer securities" from the obligation to diversify. Courts have struggled to determine what standard of care to apply to fiduciaries of ERISA-governed retirement plans that invest in employer stock. In Quan, the panel adopted the Moench presumption but stated that the presumption may be rebutted by a showing that the fiduciary abused its discretion by investing in employer stock.