The financial crisis, and the accompanying decline in stock prices, set off a wave of cases now commonly referred to as "stock-drop" cases. In these cases, plaintiffs allege that plan trustees violated the fiduciary duties owed to plan participants by continuing to offer employer stock as an investment option following a precipitous decline in the stock price.

In a much anticipated decision, the United States Court of Appeals for the Second Circuit recently joined several other circuit courts in holding that the fiduciaries of a defined contribution plan are entitled to a "presumption of prudence" in connection with the decision to continue to offer employer stock as an investment option in the plan after a significant price decline. In re: Citigroup ERISA Litigation (Case No. 09-3804-CV).

In Citigroup, the Court examined decisions made by fiduciaries of two defined contribution plans (the Plans) Citigroup established for its employees. The Plans allowed Citigroup employees to make pre-tax contributions to individual accounts under the Plan and then allocate those funds among several investments. One of the investment options was the Citigroup Common Stock Fund (the Fund), which is an investment option comprised primarily of Citigroup Common Stock. The Plans required that the Fund be included as an investment option.

Plaintiffs filed the Citigroup class action lawsuit after a significant decline in the price of Citigroup stock from $55.70 on January 1, 2007, to $26.94 on January 15, 2008. Plaintiffs alleged that the fiduciaries of the Plans breached their fiduciary duties by not divesting the Plans of Citigroup stock when Citigroup's ties to the financial crisis made it an imprudent investment option. The District Court granted Citigroup's motion to dismiss the complaint.

In a split decision, the Second Circuit affirmed the lower court's ruling. In doing so, the Second Circuit joined the Third, Fifth, Sixth and Ninth Circuits by expressly adopting the Moench presumption, which provides that a fiduciary is entitled to a presumption of compliance with ERISA when the fiduciary invests assets in the employer's stock pursuant to an express plan provision requiring that an employer stock fund be available as an investment option under the Plan.

The Court also adopted a sliding scale approach to the review of fiduciary decisions depending on the degree of discretion a plan provides plan fiduciaries to invest in employer stock. The Court explained that a fiduciary's failure to divest company stock is less likely to constitute an abuse of discretion if the plan's terms require—rather than merely permit—investment in company stock.

In affirming the dismissal of the plaintiffs' complaint, the Court held that the plaintiffs failed to allege facts sufficient to overcome the Moench presumption. The Court explained that "only circumstances placing the employer in a 'dire situation' that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms."

The Citibank decision is a significant victory for employers and the defense bar. The Court not only adopted the Moench presumption, but held that it was properly applied at the pleading stage to dismiss the plaintiffs' claims, which will be a powerful tool for defense counsel.

The decision is also instructive for employers looking to create the highest level of protection for plan fiduciaries. Under Citigroup, an employer that mandates the inclusion of company stock as an investment option in the governing plan documents can be assured that decisions by plan fiduciaries to continue to offer company stock as a plan investment will be entitled to the highest level of deference. The decision is particularly helpful to fiduciaries of employee stock ownership plans (ESOPs). Because the holding of qualified employer securities is a required term of all ESOP documents, this decision gives those fiduciaries additional support for holding company stock even during a decline in value.