Trust Variation and ERISA's 'Presumption of Prudence'
Peter J. Wiedenbeck
Washington University in Saint Louis - School of Law
April 1, 2014
Tax Notes, Vol. 142, No. 11, 2014
Washington University in St. Louis Legal Studies Research Paper No. 14-04-01
The presumption that an eligible individual account plan (EIAP) is justified in continuing undiversified investments in employer stock, first recognized in Moench v. Robertson, is derived from state trust principles governing judicial authority to modify the terms of a private trust when necessary to respond to an unanticipated emergency. These trust variation doctrines apply in factual circumstances that are loosely analogous to the crashing ESOP situation, but a solid conceptual basis for their application to pension trusts under ERISA is lacking. The importation of traditional trust variation principles into ERISA elides several serious difficulties. The automatic assumption that the employer sponsoring an EIAP is the settlor of the pension trust is one problem. Even if the plan sponsor may be treated as settlor, Moench and its progeny overlook an essential premise of the Restatement (Second) of Trusts' administrative deviation rule: It would not apply to a private trust that is amendable in the way that a pension trust is required to be. Further, the federal courts have overlooked the fact that modern trust variation principles are far more liberal than the black letter rule set forth in the Second Restatement, which was adopted in 1957. In short, the overlooked or misunderstood provenance of the Moench presumption has caused serious confusion, leading federal courts in ERISA stock drop cases to apply outdated private trust doctrines that have little direct bearing on quasi-public (that is, tax-subsidized) pension trusts.
Proper resolution of fiduciary breach claims founded on failure to diversify EIAP employer stock holdings begins with recognition that the matter involves statutory interpretation, not plan interpretation. Accommodating Congress’s multiple goals (inducing both employee ownership and retirement savings) when they come into conflict requires a critical assessment of legislative priorities, which emerged and evolved over decades, and which are evidenced by complex, technical, and seemingly unrelated provisions of both the tax code and ERISA. Careful comprehensive evaluation reveals that the presumption of prudence as developed to date in the Moench line of cases deranges ERISA’s policy equilibrium.
Number of Pages in PDF File: 26
Keywords: Employee Stock Ownership Plans, qualified retirement plans, 401(k) plans, trust variation, pension plan investments, diversification, ERISA, Employee Retirement Income Security Act of 1974, ERISA fiduciary duties
Date posted: April 3, 2014