Take a retirement plan, add company stock—and throw in a dash of economic turmoil. The result is a volatile mix that sometimes leads to "stock drop" litigation. The U.S. District Court for the Southern District of New York recently granted the defendants' motion to dismiss a stock drop case in In re Citigroup ERISA Litigation. The decision is a veritable roadmap that plan fiduciaries can use as a guide to protect themselves from claims of breach of fiduciary duty that may result when the price of company stock held in their plan declines.

In re Citigroup ERISA Litigation followed steep declines in the price of Citigroup stock between January 1, 2007, and January 15, 2008. The plaintiffs in the case, who were participants in the Citigroup 401(k) Plan and the Citibuilder 401(k) Plan for Puerto Rico, alleged that the decline resulted from Citigroup's heavy investments in subprime mortgages. The principal allegations in the plaintiffs' complaint are familiar to those who have followed stock drop litigation in recent years:

• Citigroup executives and plan fiduciaries offered Citi stock as an investment option in the 401(k) plans even though they knew it was an imprudent investment;
• The defendants failed to provide plan participants with all of the information they needed to evaluate Citi stock as an investment; and
• Citi executives failed to monitor other plan fiduciaries.

Plan Language Is Key

A large part of the court's decision to dismiss the case rested on the language of the Citigroup plans, which provided unequivocally that company stock would be maintained as an investment option in the plan (for example, the Citigroup plan provided that "the Citigroup Common Stock Fund shall be permanently maintained as an Investment Fund under the Plan"). Although the plaintiffs argued that Citigroup should have removed stock as an investment option, the plan language led the court to conclude that the plans' fiduciaries had "no discretion whatsoever" to do so.

ESOP Designation Is Critical

The court also relied on the Citigroup plan's designation as an employee stock ownership plan (and the Citibuilder plan's designation as an eligible individual account plan, which the court found to be largely synonymous with an ESOP). An ESOP is not "intended to guarantee retirement benefits," but rather to give employees an ownership stake and an interest in the company's success.

Plan Language Required Investment in Company Stock

The plaintiffs alleged that investment in Citi stock during this period of price decline was imprudent. The court concluded, however, that because the language of the plans unequivocally required investment in company stock, the defendants were "immune from judicial inquiry" regarding the prudence of retaining company stock as an investment option.

Even had the language of the plans been less clear about the requirement to retain company stock, because the plans were ESOPs, the court would have applied a presumption that investment in company stock was prudent. To overcome the presumption, plaintiffs would be required to allege sufficient facts that showed that in continuing to offer company stock as an investment option, defendants were no longer adhering to the intent of the plan. This, the court held, the plaintiffs did not do.

Role Delineation Is Vital

The plaintiffs alleged that communications from Citigroup's CEO about the financial condition of Citigroup were subject to ERISA's standards of prudence and loyalty. The court easily disposed of these allegations, since plan documents carefully laid out the role of various entities in managing the plan.

Explaining that the threshold question was whether Citi's CEO was acting as a fiduciary when discussing the financial condition of the company, the court concluded that in these discussions, the CEO was not acting as a fiduciary. Although in some cases a company can wear "two hats"— that of plan sponsor and of plan fiduciary—in this case the plan itself specified that only the Administration Committee had the fiduciary responsibility for administering the plan and communicating with participants.

Court: ERISA Does Not Require Plan Fiduciaries to Report on Financial Condition

The court also addressed the question of whether Citigroup had an obligation to communicate the financial health of the company to plan participants. Courts have held that ERISA imposes a duty on plan fiduciaries to volunteer information about plan benefits when to stay silent would harm the interests of participants. The Citigroup court did not extend this duty to volunteering information about plan investments, including the financial health of the company. Rather, the court held that Citigroup was only required to comply with ERISA's comprehensive reporting and disclosure obligations, which do not require disclosure of information bearing on the company's financial condition.

Does Your Plan Follow the Roadmap?

If your retirement plan offers company stock as an investment option, you should make sure that, in the event of litigation, you can make the same arguments that Citigroup did. This inquiry requires a thorough review of your plan documents and your plan's governance and fiduciary structures. To take full advantage of the Citigroup roadmap, you will need to draft plan documents and summary plan descriptions carefully—and with special attention to plan language, ESOP designation and delineation of roles.