Fiduciary Status Not Triggered by Contribution in Company Stock

The 2nd U.S. Circuit Court of Appeals noted that the case was dismissed by the U.S. District Court for the Southern District of New York for failure to rebut the Moench presumption of prudence U.S. courts typically give to fiduciaries of employee stock owner ship plans. But, the 2nd Circuit did not rule on this issue, as it found the defendants of the case were not fiduciaries.

In rejecting plaintiffs’ argument that the defendants were acting as fiduciaries when Morgan Stanley CEO John Mack was given discretion to determine the form of payment of company contributions to the two plans at issue, the appellate court said under the Employee Retirement Income Security Act (ERISA), fiduciary status exists only to the extent the person has or exercises the authority or control over plan management or plan assets. The 2nd Circuit explained that U.S. courts have further distinguished between what constitutes fiduciary functions and what constitutes “settlor” functions that do not trigger fiduciary liability—fiduciary functions include, for instance, “the common transactions in dealing with a pool of assets: selecting investments, exchanging one instrument or asset for another, and so on,” while “settlor” functions, in contrast, include conduct such as establishing, funding, amending, or terminating a plan.

In its opinion, the appellate court also cited an article by Lee T. Polk, “ERISA Practice and Litigation §3:32 (2013),” which states non‐fiduciary duties generally include “decisions relating to the timing and amount of contributions.” 

Since the court found the Morgan Stanley defendants were not acting in a fiduciary capacity, it ruled claims of alleged conflict of interest, failure to properly monitor investments, and co-fiduciary duty violations also failed.

The plaintiffs in the case are individuals who participated in the Morgan Stanley 401(k) Plan and the Morgan Stanley Employee Stock Ownership Plan. In January 2007 and January 2008, Morgan Stanley elected to make its employer contributions to the plans in the form of company stock instead of cash. Between December 2007 and February 2008, Morgan Stanley’s stock price decreased substantially, which prompted the plaintiffs to bring suit against the defendants to recover losses for the plan.