Court Rules on Duty of ESOP Fiduciary to Buy Company Stock

ESOPs are legally intended to be plans that are primarily invested in employer stock. This does not exempt their fiduciaries, however, from the prudence requirement that any particular decision to buy employer stock must be a financially sound one. So when is investing in employer stock, as provided by the plan, not a good idea? In Moench v. Robertson (CA 3, No. 94-5637, 8/10/95), a federal appeals court ruled that an ESOP fiduciary is entitled to a presumption that it acts in accordance with ERISA by buying company stock. However, this presumption can be overridden if the fiduciary fails to act prudently by making purchases when it knows, or should know, that the company's prospects are poor.

In this particular case, trustees of the ESOP at First National Bank of Toms River, N.J., continued to invest in company stock even in the face of a share price decline from $18.25 in 1989 to $6 in 1990. The trustees continued to buy shares until 1991, when the stock had dropped to 25 cents. Several bank insiders had expressed doubts about the company, but the trust committee did not even meet to consider the issue. The trustees thus showed no record of appropriate diligence or consideration of why the investment in company stock would make sense. The court consequently ruled in favor of plaintiffs seeking to restore value to the participants.