Millions of Americans have lost a significant amount of their retirement savings due to the collapse of the subprime mortgage backed securities market. While several groups of plaintiffs (either plan participants or other plan fiduciaries) have challenged the prudence of plan fiduciaries’ and money managers’ decision to expose the plan to risks of those securities, those challenges have largely failed. A recent decision held that Citigroup did not breach its fiduciary duty to its retirement plan participants by leaving its own company stock in its retirement plan after it allegedly knew the stock price would tumble because of the company’s heavy exposure to subprime mortgages. In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011). But most recently, following a trial, a judge in New York determined that State Street Bank breached its fiduciary duty to its clients by ignoring stated risk guidelines and failing to diversify the assets in several of its bond funds because those bond funds were between 70% and 80% invested in mortgage backed securities. In re State Street Bank & Trust Co. Fixed Income Funds ERISA Litigation, 2012 U.S. Dist. LEXIS 13556 (S.D.N.Y. Feb. 3, 2012).
This decision is finally some consolation to the plan participants who lost so much money in their retirement savings. Prior cases have been distinguishable, though, because they largely involved claims that an employer imprudently continued to offer its own stock as a retirement investment despite knowing it would lose value. Unfortunately, where a plan explicitly states that offering employer stock is part of the plan, or so “hardwired,” many courts imply a presumption of prudence on behalf of the administrator for leaving that stock in the plan, also known as the Moench presumption. While many pension practitioners have long questioned whether the typical retirement landscape today, which has transitioned from the traditional defined benefit pension plan to the individual account structure (such as a 401(k), can really provide the original stated objectives of ERISA–retirement income security. More and more baby boomers are delaying retirement to recoup investment losses because otherwise they will not have enough income to last them through retirement. Is this system really working?
If you have questions about the assets in which your retirement plan is invested and the prudence of such investments, contact an ERISA lawyer.