VOL. 31, NO. 4 SPRING 2006
Employee W J O U R N A L
Schering-Plough and the Scope further reduce the chances that a plan ﬁduciary is deemed
to have breached his or her ﬁduciary duty of care in stock
of the Moench Presumption drop situations.
This column ﬁrst summarizes the seminal case in this ﬁeld,
Craig C. Martin and William L. Scogland Moench v. Robertson, the standard for breach of ﬁduciary
duty which it established, i.e., the Moench presumption, and
L awsuits by employees against employers and other
alleged fiduciaries for breach of their fiduciary duties
imposed by the Employee Retirement Income Security Act
the rationale behind that standard. It next discusses the appli-
cation of the Moench presumption in Schering-Plough. Then,
this column surveys the available stock drop jurisprudence to
of 1974 (ERISA) seem to have reached pandemic propor- see if the Moench presumption is, in practice, only applied
tions when the employer’s stock drops in value.1 Therefore, to ESOPs or if it is applied to all EIAPs. At that point, this
any protections which the law might afford fiduciaries of an column looks at the statutory basis of the Moench presump-
employee benefit plan that invests in employer securities tion. In recognition of the ambiguity that Schering-Plough
should be of utmost interest to employer plan sponsors and and other cases have cast on this area, and thus the increased
the plan’s fiduciaries. Among the significant protections is importance of qualifying as an ESOP, this column reviews the
the general rule that fiduciaries of eligible individual account methods for such qualiﬁcation.
plans (EIAPs) are presumed to have satisfied their fiduciary
duties unless shown otherwise. This presumption, developed The Moench Presumption
in Moench v. Robertson,2 is commonly referred to as the
Moench presumption. Until recently, practitioners had no
reason to believe that the Moench presumption was not avail- In Moench, former employees sued the ﬁduciaries of the
able to all EIAPs investing in employer securities. However, company ESOP for making the decision to remain invested
the conclusion in In re Schering-Plough Corporation ERISA in employer stock at a time when the ﬁnancial condition of
Litigation,3 that the presumption is only available to plans the employer, and thus the employer’s stock, was deteriorat-
that formally qualify as employee stock ownership plans ing rapidly.4 The issue before the court in Moench was clear:
(ESOPs) has created ambiguity for employers and fiduciaries “to what extent may ﬁduciaries of ESOPs be held liable un-
anxious to understand the boundaries of their responsibility. der ERISA for investing solely in employer common stock,
An EIAP should not have to qualify as an ESOP in order when both Congress and the terms of the ESOP provide that
to receive the favorable ﬁduciary treatment offered by the the primary purpose of the plan is to invest in the employ-
Moench presumption. The text of ERISA clearly applies the er’s securities.”5 Thus, the court faced a conﬂict between the
ﬁduciary exemptions to EIAPs and, as is summarized below, Congressional mandate to keep retirement plans safe on the
federal courts have begun to agree. However, Schering- one hand and the mandate to expand the national capital
Plough has created some confusion in the area and ﬁdu- base among employees through the use of ESOPs on the
ciaries may wish to consider qualiﬁcation as an ESOP to other hand.6 In response to these pressures, the court devel-
oped the Moench presumption as a compromise. Under the
Craig C. Martin, a partner in Jenner & Block LLP’s Chicago ofﬁce, Moench presumption, an ESOP ﬁduciary who invests assets
is a member of the ﬁrm’s Management Committee and Litigation
in employer stock is entitled to a presumption that it acted
Department and is chair of the ﬁrm’s ERISA Litigation Practice.
consistently with ERISA, i.e., that its decision to remain in-
William L. Scogland, who also is a a partner in the ﬁrm’s Chicago
ofﬁce, is chair of the ﬁrm’s Employee Beneﬁts and Executive vested in employer securities was reasonable.7 However, a
Compensation Practice and co-chair of the ERISA Litigation Practice. plaintiff may overcome the presumption by establishing that
The authors can be reached at email@example.com and wscogland@ the ﬁduciary abused its discretion and that a prudent inves-
jenner.com, respectively. The authors wish to thank Galen Mason tor under the circumstances would not have followed the
for his help in preparing this article. Mr. Mason is an associate in plan’s mandate to invest in employer securities.8
Jenner & Block’s Employee Beneﬁts & Executive Compensation and Thus, Moench concluded that notwithstanding ERISA’s
ERISA Litigation practice groups. diversiﬁcation exemptions, an ESOP ﬁduciary must never-
theless diversify if diversiﬁcation is in the best interest of company’s stock began to deteriorate ﬁnancially.18 The court
the beneﬁciaries. However, under the Moench presumption, noted that the plan at issue was an EIAP and that EIAPs are
courts should presume that the ﬁduciary acted properly until exempt from ERISA’s standard ﬁduciary provisions.19 The
the plaintiff rebuts this presumption. court then dismissed the plaintiffs’ claims by noting that they
had not pled sufﬁcient facts to meet the standard set forth
Schering-Plough’s Application of the Moench in the Moench presumption.20 Thus, like the court in Wright,
Presumption Calpine presumes that the Moench presumption applies to
In Landgraff v. Columbia/HCA Healthcare Corp. of America,21
In Schering-Plough, former employees brought a class ac- plan participants brought suit for breach of ﬁduciary duty as
tion against ﬁduciaries of a retirement plan for alleged breach to their stock bonus plan.22 In determining what the standard
of their ﬁduciary duties of prudence, care, and loyalty in the of review should be for the breach in question, the court sur-
administration of the plan.9 The plan at issue was an EIAP veyed Moench and Kuper and concluded that:
that offered a company stock fund as an investment option,
but the plan was not designated an ESOP.10 The court con- As all EIAPs are exempt from the diversiﬁcation
cluded that because the plan was not an ESOP, the Moench requirement, the competing Congressional interest
presumption did not apply.11 Therefore, as it currently stands, in employee ownership of company stock and
the Third Circuit appears to have limited the application of the ﬁduciary’s duty of prudence must be balanced
the Moench presumption to ESOPs. with respect to all EIAPs. This includes the stock
bonus plan under consideration. Therefore,
Application of the Moench Presumption in the reasoning upon which the Sixth and Third
Other Cases Circuits applied the presumption of prudence to
the investment decisions of ESOP ﬁduciaries not
to diversify may equally be applied to the stock
A review of the stock drop jurisprudence reveals how bonus plan ﬁduciaries.23
other courts have interpreted the scope of the Moench pre-
sumption. There are many cases in which a court applies the The court speciﬁcally rejected the plaintiff’s contention
Moench presumption when an alleged breach of ﬁduciary that the Moench presumption does not apply to all EIAPs.24
duty involved an ESOP.12 However, in most of these cases, the Thus, for practitioners that accept the Moench presump-
court does not appear to differentiate between applying the tion’s basis in the statutory text of ERISA, the Landgraff
presumption to the plan because it is an ESOP or because the decision most clearly applies the Moench presumption in
plan, as an ESOP, qualiﬁes as a type of EIAP. a manner that ﬁts within the framework of the statute: to
However, there are breach of ﬁduciary duty cases apply to all EIAPs.
involving EIAPs that were not speciﬁcally designated In Steinman v. Hicks,25 participants in a proﬁt sharing plan
as ESOPs and that were invested in employer stock. In brought suit against plan ﬁduciaries for breach of ﬁduciary
Wright v. Oregon Metallurgical Corp.,13 participants in a duty. The court noted that the plan was an EIAP, and imme-
stock bonus plan brought suit for breach of ﬁduciary duty. diately proceeded to apply the Moench presumption.26 Thus,
The court noted that EIAPs, as those plans are deﬁned Steinman is another example of a court’s assumption that
by ERISA Section 407(d)(3),14 (and not simply ESOPs) are the Moench presumption applies not only to ESOPs, but to
exempt from several of ERISA’s ﬁduciary requirements.15 all EIAPs.
Wright did not expressly note that the Moench presump- Although there are decisions in which courts have taken
tion should be applied to EIAPs as well as ESOPs. Rather, positions similar to that set out in Schering-Plough,27 a grow-
by applying the Moench presumption to an EIAP without ing number of other decisions interpret the Moench pre-
discussing the fact that the EIAP at issue was not an ESOP, sumption to apply to any EIAP.28 Like the cases discussed
the court presumed that no distinction should be made above, these cases either do so speciﬁcally or presume that
between EIAPs and ESOPs. Therefore, unlike the explicit the application of the Moench presumption to all EIAPs is
decision in Schering-Plough to limit the Moench presump- self-evident and, therefore, not an issue.
tion to ESOPs, Wright impliedly recognized the larger
category of EIAPs as the proper scope of plans eligible for The Origins of the Moench Presumption
the Moench presumption.16
In In re Calpine Corp. ERISA Litigation,17 plaintiffs alleged
that defendants breached their duty to prudently and loy- Perhaps the clearest evidence that the employer stock ex-
ally manage plan assets by failing to remove the company emption, and thus the Moench presumption standard, applies
stock fund as an investment option under the plan when the to EIAPs and not just ESOPs lies within the text of ERISA.
Section 404(a)(2) of ERISA states that “In the case of an eligi- plan should only maintain a small amount of cash for
ble individual account plan [emphasis added]…, the diversi- liquidity purposes. The less cash the plan has on hand the
ﬁcation requirement…and the prudence requirement (only less likely it will be considered an investment option and
to the extent that it requires diversiﬁcation)…is not violated the stronger the tie with the policies underlying Moench.
by acquisition or holding of qualifying employer real prop- In addition, the plan document should grant little or no
erty or qualifying employer securities.”29 That same section discretion to the ﬁduciary regarding the investment in
notes that EIAP is deﬁned in Section 407(d)(3) of ERISA to company stock. For example, rather than use the general
generally include “a proﬁt-sharing, stock bonus, thrift plan, statutory language of “primarily invested in,” a plan might
savings plan, or ESOP...as long as such plan explicitly pro- explicitly state that “the company stock fund will be 100%
vides for the acquisition and holding of qualifying employer invested in company stock, other than a marginal cash
securities.”30 Despite the fact that the holding in Moench ap- account of 1% to 2%.”
plied the employer stock exemption to an ESOP, the ERISA The concept of an “employee stock ownership plan”
section that the presumption is based upon clearly applies has primarily tax signiﬁcance. While the signiﬁcance has
to all EIAPs. varied over the course of the thirty plus years since the
Although the Third Circuit’s Moench presumption is ulti- adoption of ERISA, the only current tax consequences are:
mately based on the text of ERISA, the Moench decision (i) there will be no prohibited transaction in a leveraged
itself cited case law which, when evaluated closely, does not ESOP; and (ii) in certain circumstances, the employer may
limit applying ERISA’s employer stock exemption to ESOPs deduct dividends paid on stock held in an ESOP. Most
and clearly applied it to all EIAPs. In Fink v. National Sav. ERISA practitioners believe that any employer stock fund in
and Trust Co.,31 which Moench cited for the proposition that an EIAP may be an ESOP for tax purposes just by making
the investment decisions of a proﬁt sharing plan’s ﬁduciary sure that the fund complies with the ESOP rules. Indeed,
are subject to the closest scrutiny under the prudent person most stock funds of plans maintained by publicly-traded
rule,32 the D.C. Circuit evaluated a proﬁt sharing plan and companies comply with the ESOP rules anyway. The ESOP
noted that the requirement of ERISA, that a plan diversify its qualiﬁcation rules are not cumbersome—e.g., pass-through
assets, does not apply to the holding of employer securities voting, limited diversiﬁcation rights. It is unclear why the
by EIAP’s.33 In Eaves v. Penn,34 which Moench cited for the tax status of a plan or its stock fund should create substan-
proposition that ERISA’s strict standards override the policies tively different results under ERISA. If a plan sponsor has
behind ESOPs,35 the court clearly identiﬁed an ESOP as a not already done so, it should probably consider position-
class of EIAP before holding that the prudent man rule and ing its plan’s employer stock fund as an ESOP, if for no
the rule that all acquisitions be solely in the interest of plan other reason than the dividend deduction. This should also
participants still applied—thereby, forming a platform from put the employer and other ﬁduciaries in a better position
which Moench could spring.36 to avoid the situation in which a court would apply the
Trying to Assure Moench Treatment
Regardless of the proper interpretation, savvy plan admin-
istrators will want to ensure that their plan minimizes ﬁdu- For judges who accept the Moench presumption as valid
ciary liabilities regardless of how the Moench presumption is and, in applying it to an employee beneﬁt plan, wish to stay
applied. Of all of the decisions that do adhere to the Moench within the conﬁnes of ERISA, the EIAP at issue should not
presumption, one thing is clear: ﬁduciaries of ESOPs are en- have to be an ESOP in order to get the Moench presump-
titled to a presumption of compliance with their ﬁduciary du- tion. The statute is clear that the ﬁduciary exemptions apply
ties. Rather than debate the application of the Moench pre- to EIAPs. Furthermore, numerous courts have interpreted the
sumption, qualiﬁcation as an ESOP can provide a more reli- Moench presumption to apply to all EIAPs and not just ESOPs.
able assurance for ﬁduciaries. However, following the ambiguity introduced by Schering-
An ESOP is an ERISA EIAP that invests primarily in Plough, ﬁduciaries may wish to consider qualiﬁcation as an
“qualifying employer securities,” which typically are shares ESOP to further reduce the chances that a plan ﬁduciary is
of stock in the sponsor of the plan.37 In order to qualify as deemed to have breached his or her ﬁduciary duty of care in
an ESOP, the plan document must state that it is designed stock drop situations.
to invest primarily in qualifying employer securities.38 In It is unclear if other courts will run with Schering-Plough’s
addition to requiring that the plan should invest primar- limitation of the Moench presumption. Other courts have
ily in employer securities, the plan should also explicitly already reached similar conclusions.39 It is unlikely that the
state that it is designed to be an ESOP. Furthermore, the issue will be authoritatively resolved soon.
Notes 21. 2000 WL 33726564 (M.D. Tenn. May 24, 2000), aff’d, 30 Fed.
App. 366 (6th Cir. 2002).
1. See http://www.esopassociation.org/media/media_pressreleases_
031605.asp (noting that in early 2005, nearly ﬁve dozen cases were 22. Id. at 4.
pending in federal courts.) 23. Id. at 6.
2. 62 F.3d 553 (3rd Cir. 1995). 24. “. . .after reviewing the reasoning of the Sixth Circuit in its decision
3. 420 F.3d 231 (3rd Cir. 2005). to apply a presumption of prudence to the ﬁduciary duty of ESOP
ﬁduciaries, the Court ﬁnds that the same reasoning may be applied
4. Moench, 62 F.3d at 557. to the SBP. Accordingly, the Court ﬁnds that the presumption of
5. Id. at 556. prudence applies to the decisions of the defendants to invest the
SBP assets in company stock.” Id.
6. In Donovan v. Cunningham, the court noted that ESOPs are
described “as . . . device[s] for expanding the national capital base 25. 252 F. Supp. 2d 746 (C.D. Ill. 2003), aff’d, 352 F.3d 1101 (7th Cir.
among employees—an effective merger of the roles of capitalist and 2003).
worker.” Donovan v. Cunningham, 716 F.2d 1455, 1458 (C.A. Tex. 26. Id. at 758–759.
1983). Notwithstanding all of this, ESOPs are covered by ERISA’s
stringent requirements, and except for a few select provisions, ESOP 27. In re Westar Energy, Inc., ERISA Litigation, 2005 WL 2403832
ﬁduciaries must act in accordance with the duties of loyalty and (D.Kan., Sep 29, 2005) (refusing to apply the Moench presumption
care. In other words, “Congress expressly intended that the ESOP to non-ESOP EIAPs, i.e., a 401(k) plan with a stock fund, and noting
would be both an employee retirement beneﬁt plan and a ‘technique that the genesis of the presumption of prudence is a recognition
of corporate ﬁnance’ that would encourage employee ownership.” that ESOPs are different; they are designed to invest in company
Martin v. Feilen, 965 F.2d 660, 664 (1992) (quoting 129 Cong.Rec. stock with a goal of employee ownership in the company, rather
S16629, S16636 (Daily ed. Nov. 7, 1983) (statement of Sen. Long)). than diversiﬁcation and minimization of risk); Unaka Co., Inc. v.
Newman, 2005 WL 1118065 at 20–21 (E.D. Tenn., Apr 26, 2005)
7. Moench, 62 F.3d at 571.
(holding that the Moench presumption does not apply to all EIAPs);
8. In establishing the standard of review the Moench court looked to Difelice v. U.S. Airways, Inc., 2005 WL 2674994 at fn.15 (E.D. Va.
the common law of trusts. In other words, to overcome the Moench Oct. 19, 2005) (holding that the Moench presumption only applies
presumption, the plaintiff must show that the ERISA ﬁduciary could to ESOPs).
not have believed reasonably that continued adherence to the
ESOP’s direction was in keeping with the settlor’s expectations of 28. See Pennsylvania Fed. v. Norfolk So. Corp., 2004 WL 228685 at 7
how a prudent trustee would operate. Moench, 62 F.3d at 571. (E.D. Penn. Feb. 4 2004) (noting that the distribution between ESOP
and other types of EIAPs, such as proﬁt sharing plans and savings
9. Schering-Plough, 420 F.3d at 232. plan is irrelevant); In re JDS Uniphase Corp. ERISA Litigation, 2005
10. Id. at 236. WL 1662131 at 6–7 (N.D. Cal. Jul 14, 2005); In re Syncor ERISA
Litigation, 351 F. Supp. 2d 970, 979 (C.D. Cal., 2004) (noting that A
11. Id. at 238. presumption exists that a ﬁduciary who invests in employer stock for
12. See Moench, 62 F.3d at 553; Kuper v. Iovenko, 66 F.3d 1447, EIAP or ESOP plans acted consistently with ERISA).
1458–1459 (6th Cir. 1995); Lalonde v. Textron, Inc., 369 F.3d 1, 3 29. 29 USCA 1104(a)(2).
(1st Cir. 2004) (acknowledging that the district court employed the
Moench presumption to the ESOP at issue); In re McKesson HBOC, 30. 29 USCA 1107(d)(3)(A) and (B).
Inc., ERISA Litigation, 2002 WL 31431588 at 5 (N.D. Cal.).
31. 772 F.2d 951 (C.A.D.C., Sept. 03, 1985).
13. 360 F.3d 1090 (9th Cir. 2004).
32. Moench, 62 F.3d at 570.
14. 29 U.S.C. § 1107(d)(3).
33. Fink, 772 F.2d at 955.
15. See Wright, 360 F.3d at 1097.
34. 587 F.2d 453 (C.A.Okl., Nov 21, 1978).
16. Id. at 1098.
35. Moench, 62 F.3d at 569.
17. In re Calpine Corp. ERISA Litigation, 2005 WL 1431506 (N.D. Cal.
March 31 2005). 36. Eaves, 587 F.2d at 457–459.
18. Id. at 4. 37. 29 U.S.C. § 1107(d)(6)(A).
19. Id. 38. Treas. Reg. § 54.4975-11(a)(2) and (b).
20. Id. at 5. 39. See supra note 27.
Reprinted from Employee Relations Law Journal, Volume 31, Number 4, Spring 2006, pages 103-110,
with permission from Aspen Publishers, a WoltersKluwer Company, New York, NY