Taveras v. UBS: Court limits "presumption of prudence" in stock drop cases

July 07, 2013

The 1995 decision by the Third Circuit Court of Appeals in Moench v. Robertson is generally understood to provide a "presumption of prudence" with respect to company stock funds in certain defined contribution plans. The recent decision by the Second Circuit Court of Appeals in Taveras v. UBS AG et al.(February 27, 2013) limits that presumption to plans which, by their terms, "strongly encourage" investment in company stock or a company stock fund.

In this article we review the Second Circuit's decision.


The case involves a suit by participants in two plans sponsored by UBS AG, the 401K Plus Plan ("Plus Plan") and the Savings and Investment Plan ("SIP"). Both plans offered UBS stock funds, and both plans sustained significant losses in those stock funds in late 2008. (Quoting the court: “UBS stock fell some 74% between April 26, 2007, when it reached a twelve-month high, and ... October 16, 2008.”)

Plaintiffs brought a number of claims, but the focus of the Second Circuit's decision (and this article) was the first, that "Defendants breached their fiduciary duties under ERISA by imprudently continuing to offer participants in both the Plus Plan and the SIP the option to invest in the UBS Stock Fund because UBS stock and the UBS Stock Fund were adversely affected by, inter alia, UBS's investments in risky subprime mortgage backed securities and other fixed income assets ...." Basically, the claim was that it was imprudent to continue to offer a UBS stock fund during the period 2007-2008.

Lower court decision

The lower court had dismissed this claim, finding that the "presumption of prudence" established in Moench applied.

Under the Moench analysis, Plaintiffs could succeed only if they had "plead[ed] facts from which it may be plausibly inferred that, by continuing to make the UBS Stock Fund available to plan members, Defendants abused their discretion as fiduciaries. ... To make such a showing, it is insufficient for Plaintiffs merely to allege that Defendants "were aware of 'circumstances that may impair the value of company stock.' ... Rather, Plaintiffs must plead "persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have considered themselves bound to divest."

Typically, facts overcoming a Moench "presumption of prudence" are: "allegations of 'the fiduciary's knowledge at a pertinent time of an imminent corporate collapse or other dire situation'…." (Emphasis added.)

Second Circuit decision

The Second Circuit found that the "presumption of prudence" applied to the Plus Plan but did not apply to the SIP.

With respect to the Plus Plan, the Second Circuit found:

Section 1.2 of the Plus Plan Plan Document states that the "purpose" of the plan is to "attract and retain qualified individuals by providing them with an opportunity to accumulate assets for their retirement and to acquire [UBS] Common Stock." ... Section 11.2(a) of the same document states that "[t]he Trustee shall invest and reinvest all amounts in each Participant's Accounts . . . from among the Investment Funds made available by the Investment Committee . . . one of which shall be the [UBS] Common Stock Fund." ... The Investment Committee is allowed to "add[ ] or delete[ ]" any of the available investment funds, presumably including the UBS Stock Fund, "from time to time."

Its conclusion was that these provisions were enough to support the District Court's finding that "the Plus Plan sufficiently mandated or encouraged [its] fiduciaries to provide plan investors the option to invest in the UBS Stock Fund so as to trigger the presumption of prudence."

No presumption of prudence in the SIP

With respect to the SIP, the District Court reasoned that provisions that identify and provide rules (e.g., with respect to voting) for a UBS stock fund "provide sufficient evidence of the settlor's clear intent that the Stock Fund be offered as an investment option." The Second Circuit disagreed, finding that those provisions "[do] not in any way require or encourage [SIP] fiduciaries to offer the UBS Stock Fund as an investment option to plan participants, as opposed to any other available investment fund."


Based on the Second Circuit's decision in Taveras, it's hard to avoid the conclusion that if you have the ‘right words’ in your plan, plan fiduciaries will get the benefit of the Moench "presumption of prudence." Sponsors of defined contribution plans that offer company stock will therefore want to review plan documents to determine whether the language in them will support that presumption. The Taveras case now goes back to the lower court for further consideration. It could be settled. If it is not, then the lower court will have to deal with other defenses to Plaintiffs' claims, such as (conceivably) ERISA section 404(c). We would (further) observe that the issue of whether prudence requires a fiduciary to ‘de-list’ an investment option that is currently trading in the market at a market price is difficult and controversial.

We will continue to follow these issues.

October Three, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

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