Case No. 12-10416

United States Court of Appeals for the Fifth Circuit

RANDY KOPP, Individually and on Behalf of All Others Similarly Situated, Plaintiff – Appellant,

v. SCOTT W. KLEIN; DONALD B. REED; STEPHEN L. ROBERTSON; THOMAS S. ROGERS; PAUL E. WEAVER; JOHN J. MUELLER; JERRY V. ELLIOT; SAMUEL D. JONES; KATHERINE J. HARLESS; THE EMPLOYEE BENEFITS COMMITTEE; GEORGIA SCAIFE; JOHN DOES 1-20; WILLIAM GIST; STEVEN GABERICH; CLIFFORD WILSON; BILLY MUNDY; ANDREW COTICCHIO; THE HUMAN RESOURCES COMMITTEE; FRANK P. GATTO, Defendants – Appellees.

On Appeal from the United States District Court

Northern District of Texas (Dallas Division)

BRIEF OF AMICUS CURIAE AARP IN SUPPORT OF PLAINTIFF-APPELLANT URGING REVERSAL

Mary Ellen Signorille* AARP Foundation Litigation misgnorille@aarp.org (202) 434-2060 *Counsel of Record Melvin Radowitz AARP 601 E St., NW Washington, DC 20049

Attorneys for Amicus Curiae

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CERTIFICATE OF INTERESTED PERSONS

(1) Randy Kopp v. Scott W. Klein, et al., No. 12-10416

(2) The undersigned counsel of record certifies that the following listed persons

and entities as described in Rule 28.2.1 have an interest in the outcome of this case.

These representations are made in order that the judges of this court may evaluate

possible disqualifications or recusals.

Appellant: Randy Kopp Attorneys for Appellant: Gainey & McKenna Thomas James McKenna Roger F. Claxton Egleston Law Firm Gregory M. Egleston Rigrodsky & Long, PA Seth D. Rigrodsky Brian D. Long Timothy J. MacFall Roger F. Claxton Amicus Curiae: AARP Attorneys for Amicus Curiae: Mary Ellen Signorille Melvin Radowitz Jay E. Sushelsky

Appellees: Scott W. Klein; Donald B. Reed; Stephen L. Robertson; Thomas S. Rogers; Paul E. Weaver; John J. Mueller; Jerry V. Elliot ;Samuel D. Jones ;Katherine J. Harless; Employee Benefits Committee; Georgia Scaife; John Does 1-20; William Gist; Steven Gaberich; Clifford Wilson; Billy; Mundy; Andrew Coticchio; Human Resources Committee; Frank P. Gatto Attorneys for Appellees: Jay P. Lefkowitz David Scott Flugman James Philip Gillespie Dee J. Kelly, Jr. Christopher Landau Eric Foster Leon Marcus Gerardo Mungioli /s/Mary Ellen Signorille

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TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS .......................................................i

TABLE OF AUTHORITIES ................................................................................. iv

INTEREST OF AMICUS CURIAE .......................................................................... 1

SUMMARY OF ARGUMENT ............................................................................... 2

ARGUMENT ........................................................................................................... 3

I. BECAUSE EMPLOYEES BEAR ALL OF THE RISK OF LOSS IN A DEFINED CONTRIBUTION RETIREMENT PLAN, PLAN FIDUCIARIES MUST ABIDE BY THE STATUTORY REQUIREMENTS OF PRUDENCE AND LOYALTY ................................................................................ 3 A. Because The Community Of Defined Contribution Retirement Plan Participants Depends Upon Sound Plan Investments To Fund Their Retirement, Plan Fiduciaries’ Roles In The Investment Selection Process Is Central To Plan Effectiveness ............................................... 3

1. Retirement plan participants are exposed to a new and changing retirement savings regime ................ 3

2. Plan fiduciaries’ investment selections must take into consideration participants’ limited opportunity and ability to make suitable investment decisions in their plans ................................................................... 5

B. Because Participants Often Lack Financial Literacy, They Rely On Fiduciaries To Ensure That Plan Investment Options Are Prudent Choices.................................................... 7

1. Americans’ financial literacy skills are extremely Low ................................................................................. 7

2. Many employees erroneously believe employer Stock is safer than other investments ............................. 9

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3. Many participants are not confident in their

investment abilities and rely on plan fiduciaries to manage investment options prudently, loyally, and in their best interests .............................................. 11

4. Legislative history confirms that ERISA contains no exception to the fiduciary duties of loyalty and prudence ................................................................. 13

II. BECAUSE PLEADING REQUIREMENTS ARE ENUMERATEDIN THE FEDERAL RULES OF CIVIL PROCEDURE, “A REQUIREMENT OF GREATER SPECIFICITY FOR PARTICULAR CLAIMS IS A RESULT THAT MUST BE OBTAINED BY THE PROCESS OF AMENDING THE FEDERAL RULES, AND NOT BY JUDICIAL INTERPRETATION.” ................................................... 16

CONCLUSION ...................................................................................................... 19 CERTIFICATE OF SERVICE .............................................................................. 20 CERTIFICATE OF COMPLIANCE ..................................................................... 21

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TABLE OF AUTHORITIES

Cases Braden v. Walmart, 588 F.3d 585 (8th Cir. 2009) ............................................................................ 19 Conn. Nat’l Bank v. Germain, 503 U.S. 249 (1992) .......................................................................................... 15 Difelice v. U.S. Airways, Inc., 497 F.3d 410 (4th Cir. 2007) ............................................................................ 17 Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983) .......................................................................... 16 Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978) .......................................................................... 14 Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir. 2007) ............................................................................. 18 Griffin v. Flagstar Bancorp, Inc., 2012 U.S. App. LEXIS 15307 (6th Cir. 2012) ................................................. 17 In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011) ............................................................................. 18 Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008) ............................................................................ 17 Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012) ........................................................................ 17 LaRue v. DeWolff, Boberg & Assocs., 552 U.S. 248 (2008) ............................................................................................ 3 Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985) .......................................................................................... 11 Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) ............................................................................... 17

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Pfeil v. State St. Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012) ...................................................................... 17, 18 Quan v. Computer Scis. Corp., 623 F.3d 870 (9th Cir. 2010) ............................................................................ 17 Safety Nat'l Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009) ............................................................................ 15 Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002) .......................................................................................... 18 Wheeler v. Pilgrim's Pride Corp., 591 F.3d 355 (5th Cir. 2009) ............................................................................ 15

Statutes, Rules and Regulations

Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. ...................................................................... 1, 3 § 2, 29 U.S.C. § 1001 ........................................................................................ 16 § 2b, 29 U.S.C. § 1001(b) ................................................................................. 11 § 404(a), 29 U.S.C. § 1104(a) ........................................................................... 16 § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A) .................................................. 1, 11 § 404(c), 29 U.S.C. 1104(c) .............................................................................. 15 § 502(a), 29 U.S.C. § 1132(a) .......................................................................... 11 Fed. R. App. P. 29(c)(5) .......................................................................................... 1 29 C.F.R. § 2550.404c-1 (2007) ............................................................................ 15

Legislative History

H.R. Rep. No. 90-1867 (1968) ......................................................................... 13, 14 H.R. Conf. Rep. No. 93-1280 (1974), reprinted in 1974 U.S.C.C.A.N. 5038 ........................................................ 14, 15 S. Rep. No. 93-127, 93 Cong., 1st Sess., reprinted in 1974 U.S.C.C.A.N. 4838 .............................................................. 14

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Strengthening Worker Retirement Security Before the H. Comm. on Education and Labor, 111th Cong. (2009), available at

http://www.gpo.gov/fdsys/pkg /CHRG-111hhrg47491/pdf/CHR G-111hhrg 47491.pdf .......................................................................................... 4

Miscellaneous

AARP, 401(k) Participants’ Awareness and Understanding of Fees (July 2007), available at http://assets.aarp.org/rgcenter /econ/401k_ fees.pdf ............................................................................................................... 5 AARP, Investor Perceptions and Preferences Toward Selected Stock Market Conditions and Practices: An AARP Survey of Stock Owners Ages 50 and Older (Mar. 2004), available at http://assets.aarp.org/ rgcenter/econ/investor.pdf ............................................................................ 6, 11 Andrea Coombes, U.S. Retirement Income Deficit: $6.6 Trillion, Marketwatch (Sept. 15, 2010), http://www .marketwatch.com/story/ us-retirement-income-deficit-66-trillion-2010-09-15 ....................................... 10 Fin. Ind. Regulatory Auth. Investor Educ. Found., Financial Capability in the United States: Initial Report of Research Findings from the 2009 National Survey (Dec. 2009), available at http://www.finrafounda tion.org/web/groupsfoundation/@foundation /documents/foundation/ p120536.pdf .................................................................................................... 8, 9 Eleanor Laise, Despite Risks, Workers Guzzle Company Stock, Wall St. J., Mar. 5, 2009, http://online.wsj. com/article/SB123621 372710 035183.html ........................................................................................................ 9 Annamaria Lusardi, Household Saving Behavior: The Role of Financial Literacy, Information and Financial Education Programs (Nat’l Bureau of Econ. Research, NBER WP No. 13824, Feb. 2008), available at http://www.nber.org/papers/w13824 .............................................. 7 Annamaria Lusardi, Olivia S. Mitchell & Vilsa Curto, Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 2008 HRS (Univ. Mich. Ret. Res. Ctr., WP 2009-216, 2009), available at http://www. mrrc.isr.umich.edu /publications/papers

/pdf/wp216.pdf .................................................................................................... 9

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Matthew Martin, Literature Review on the Effectiveness of Financial Education (Fed. Reserve Bank of Richmond, WP No. 07-3, June 2007), available at http://www.richmondfed.org /publications/research/working

papers/2007/pdf /wp07-3.pdf .............................................................................. 7 Dr. Allen Michel & Dr. Israel Shaked, Fiduciary Responsibility in the Case of Defined Contribution Plans, 23-JAN Am. Bankr. Inst. J. 46 (2005) ................................................................................................. 4 Olivia S. Mitchell & Stephen P. Utkus, Company Stock and Retirement Plan Diversification 12 (Pension Research Council of the Wharton Sch. of the Univ. of Penn., PRC WP 2002-4, 2002), available at https://institu tional.vanguard.com/iam/pdf/CRR_company_stock.pdf ................................. 12 Olivia Mitchell & Steve Utkus, Lessons from Behavioral Finance for Retirement Plan Design (Pension Research Council of the Wharton Sch. of the Univ. of Penn., PRC WP 2003-6, 2003), available at http://fic.wharton.upenn .edu/fic/papers/03/0334.pdf .................................. 12 Joe Mont, The Dangers of Investing in Your Company Stock, Newsweek (July 9, 2010), http://www.news week.com/blogs/jobbed/2010/07/ 09/the-dangers-of-investing-in-your-company-stock.html .............................. 10 Pension & Welfare Benefits Admin., Study Of 401(K) Plan Fees And Expenses §1.1 (1998), available at http://www.dol.gov/ebsa/pdf/401 krept.pdf .............................................................................................................. 4 Ben Steverman, Sell Your Employer’s Stock. Now., Bloomberg Business week (March 19, 2008), http://www.businessweek.com/investing/insights

/blog/archives/ 2008/03/sell_your_employers_stock_now.html ...................... 10 U.S. Gov’t Accountability Office, GAO-07-530T, Private Pensions: Increased Reliance On 401(K) Plans Calls For Better Information On Fees 5 (March 2007), available at http://www.gao.gov/new.items /d07530t.pdf .................................................................................................... 3, 4

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U.S. Gov’t Accountability Office, GAO-08-774, Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges For 401(K) Plan Sponsors (July 2008), available at http://www.gao.gov/new. items/d08774.pdf ................................................................................................ 4 Jack VanDerhei, Sarah Holden, Luis Alonso & Steven Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010 (Employee Benefits Research Inst., Issue Brief No. 366, 2011), available at http://www.ebri .org/pdf/briefspdf/ EBRI_IB_12-

2011_No366_401%28k%29-Update.pdf.................................................. 5, 6, 12 Wall Street Employee Owners Shudder As Bear Stearns Implodes, Marketwatch (Mar. 17, 2008), http://www.marketwatch.com/story/ wall-street-employee-owners-shudder-as-bear-stearns-implodes?page number=2 ............................................................................................................ 9 James A. Wooten, The Employee Retirement Income Security Act of 1974: A Political History at 257-58 (2004) .................................................. 13

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INTEREST OF AMICUS CURIAE1

AARP is a nonprofit, nonpartisan organization with a membership that helps

people 50+ have independence, choice and control in ways that are beneficial and

affordable to them and society as a whole. Nearly one-third of AARP’s members

are currently employed with many working for employers which provide pension

and health plans covered by the Employee Retirement Income Security Act of

1974 (ERISA), 29 U.S.C. § 1001 et seq. Many other members are retired and

receiving or have received retirement benefits from those employers.

Participants in private, employer-sponsored employee benefit plans rely on

ERISA to protect their rights under those plans. In particular, ERISA’s protections,

and plan participants’ opportunities to enforce the statute’s protections, are of vital

concern to workers of all ages and to retirees, since the quality of workers’ lives in

retirement depends heavily on their retirement plan benefits.

AARP members have a significant interest in ensuring that plan assets will

be available to pay the benefits to which they are entitled and that these assets are

used exclusively for the benefit of participants. ERISA § 404(a)(1)(A), 29 U.S.C.

§ 1104(a)(1)(A). Moreover, they also have an interest in ensuring that fiduciaries

properly and prudently administer the plan and manage plan assets.

1 Pursuant to Fed. R. App. P. 29(c)(5), amicus curiae AARP certifies that the parties have consented to the filing of this brief.

2

Resolution of the issues in this case will have a direct and vital bearing on

plan participants’ ability to police and protect their pension plans from

mismanagement, to guard the integrity of the administration of employee benefit

plans, and to ensure the availability of assets for retirement benefits which will

foster their economic security. AARP, therefore, submits its brief amicus curiae to

facilitate a full consideration by this Court of these issues

SUMMARY OF ARGUMENT

ERISA retirement plan fiduciaries play a crucial role in the current

employer-sponsored retirement savings plan regime. Plan participants generally

have no choice but to rely on plan fiduciaries to craft the menu of investment

options to be offered by the plan.

Plan participants have a protectable right under ERISA to rely upon

fiduciaries, which enjoy no exemption from ERISA’s duties of prudence and

loyalty in the context of employer stock plans.

ERISA provides no warrant for the Court to craft new pleading standards not

enumerated in the Federal Rules of Civil Procedure. The Moench presumption

should have no application at the motion to dismiss stage.

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ARGUMENT

I. BECAUSE EMPLOYEES BEAR ALL OF THE RISK OF LOSS IN A DEFINED CONTRIBUTION RETIREMENT PLAN, PLAN FIDUCIARIES MUST ABIDE BY THE STATUTORY REQUIREMENTS OF PRUDENCE AND LOYALTY. A. Because The Community Of Defined Contribution Retirement

Plan Participants Depends Upon Sound Plan Investments To Fund Their Retirement, Plan Fiduciaries’ Roles In The Investment Selection Process Is Central To Plan Effectiveness. 1. Retirement plan participants are exposed to a new and

changing retirement savings regime.

Private retirement pension benefit programs were established to provide a

stable source of income to employees and their families upon retirement. In the

period since the passage of the Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. § 1001 et seq. (2006), and particularly in the past two

decades, there has been a marked shift from defined benefit plans to defined

contribution plans. LaRue v. DeWolff, Boberg & Assocs., 552 U.S. 248 (2008).

Defined contribution plans have so eclipsed defined benefit plans that “[b]y 2005 .

. . roughly 21 million active participants [were] covered by defined benefit plans

and approximately 55 million active participants [were covered by] defined

contribution plans.” U.S. Gov’t Accountability Office, GAO-07-530T, Private

Pensions: Increased Reliance On 401(K) Plans Calls For Better Information On

Fees 5 (March 2007), available at http://www.gao.gov/new.items/d07530t.pdf

[hereinafter Increased Reliance On 401(K) Plans]. Of the various types of defined

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contribution plans available, 401(k) plans have become the most popular. See Dr.

Allen Michel & Dr. Israel Shaked, Fiduciary Responsibility in the Case of Defined

Contribution Plans, 23-JAN Am. Bankr. Inst. J. 46, 46 (2005). As of 2005, there

were approximately “436,000 401(k) plans that held about $2.4 trillion in assets for

the retirement savings of more than 54 million plan participants—more than any

other type of employer-sponsored pension plan in the United States.” U.S. Gov’t

Accountability Office, GAO-08-774, Private Pensions: Fulfilling Fiduciary

Obligations Can Present Challenges For 401(K) Plan Sponsors 1 (July 2008),

available at http://www.gao.gov/new.items/d08774.pdf.

In contrast to the predictable retirement income stream that flows from a

defined benefit plan, in a defined contribution plan employer and/or employee

contributions invested in a tax-deferred qualified plan determine the dollar amount

a participant will receive in retirement, completely subject to the investment

performance-driven accumulation that results over the life of the account. Pension

& Welfare Benefits Admin., Study Of 401(K) Plan Fees And Expenses §1.1

(1998), available at http://www.dol.gov/ebsa/pdf/401krept.pdf; see also LaRue,

552 U.S. at 250 n.1. (2008) (contrasting defined benefit and defined contribution

plans). Accordingly, employees bear a far greater responsibility for the ultimate

funding of their retirement income than previously. Increased Reliance On 401(K)

Plans, supra, at 9; Strengthening Worker Retirement Security Before the H. Comm.

5

on Education and Labor, 111th Cong. 3 (2009) (statement of John C. Bogle,

Founder and Former Chief Executive of the Vanguard Group), available at

http://www.gpo.gov/fdsys/pkg /CHRG-111hhrg47491/pdf/CHRG-111hhrg

47491.pdf (describing this transition to defined contribution plans as “a massive

transfer from business enterprises to their employees of both investment risk (and

return) and the longevity risk of retirement funding”).

2. Plan fiduciaries’ investment selections must take into consideration participants’ limited opportunity and ability to make suitable investment decisions in their plans.

For the majority of individuals now saving for retirement through 401(k)

plans, the amount contributed and accumulated is critically important, as it is often

their only source of private retirement income. “[M]ore than 60 percent of workers

with pension coverage in 2003 had only a 401(k) plan or other defined contribution

plan, which suggests that worker reliance on defined contribution plans has

increased considerably since 1981.” AARP, 401(k) Participants’ Awareness and

Understanding of Fees 2 (July 2007), available at http://assets.aarp.org/rgcenter

/econ/401k_fees.pdf.

Moreover, most 401(k) account balances are of modest size. Based on

industry estimates for 2010, 39.2 percent of participants had balances of less than

$10,000, while just 16.1 percent had balances greater than $100,000. Jack

VanDerhei, Sarah Holden, Luis Alonso & Steven Bass, 401(k) Plan Asset

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Allocation, Account Balances, and Loan Activity in 2010 at 10-12 (Employee

Benefits Research Inst., Issue Brief No. 366, 2011), available at http://www.ebri

.org/pdf/briefspdf/ EBRI_IB_12-2011_No366_401%28k%29-Update.pdf. In fact,

the median participant had a balance of just $17,686. Id. Yet active participants’

ongoing contributions to their plans will continue to increase these balances and

also to raise the stakes for prospective retirees and their beneficiaries. In this

environment, a fiduciary’s duty of selecting prudent investments rises to critical

significance because participants’ investment selections are limited by the plan

fiduciary’s selection of available fund options.

Research indicates that participants are not confident of their abilities to

select prudently from among the investment options available to them, which

emphasizes the significance of a plan fiduciary’s role to prudently select funds. For

example, a survey of stock owners age 50 to 70 indicates that:

close to three in four respondents (72-76%) have more confidence in the abilities of mutual fund managers or stock brokers to conduct transactions for them than they have in their own abilities to conduct transactions. In contrast, only one in three (33%) are confident in their ability to buy and sell individual stocks without the assistance of stock brokers.

AARP, Investor Perceptions and Preferences Toward Selected Stock Market

Conditions and Practices: An AARP Survey of Stock Owners Ages 50 and Older

(Mar. 2004), available at http://assets.aarp.org/rgcenter/econ/investor.pdf.

[hereinafter Investor Perceptions]. The rapid growth and primacy of such plans to

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fund retirement makes it vital that defined contribution retirement plan participants

be protected.

B. Because Participants Often Lack Financial Literacy, They Rely On Fiduciaries To Ensure That Plan Investment Options Are Prudent Choices. 1. Americans’ financial literacy skills are extremely low.

As 401(k) plans became more common in the workplace, research has

focused on the impact of financial literacy on participants’ saving and investing

behavior. The findings are sobering. Early research exposed the lack of financial

literacy among savers and investors and the implications for individuals’ economic

security. See Annamaria Lusardi, Household Saving Behavior: The Role of

Financial Literacy, Information and Financial Education Programs 7 (Nat’l

Bureau of Econ. Research, NBER WP No. 13824, Feb. 2008), available at

http://www.nber.org/papers/w13824. In response to these findings, financial

education programs were developed and promoted. Matthew Martin, Literature

Review on the Effectiveness of Financial Education 3 (Fed. Reserve Bank of

Richmond, WP No. 07-3, June 2007), available at http://www.richmondfed.org

/publications/research/working papers/2007/pdf /wp07-3.pdf. Even after significant

attempts to promote financial education, financial literacy is still frighteningly low.

Lusardi, supra, at 21.

8

In a recently completed study to evaluate financial knowledge, respondents

were exposed to a battery of five questions covering fundamental concepts of

economics and finance impacting everyday life, such as calculations involving

interest rates and inflation, principles relating to risk and diversification, the

relationship between bond prices and interest rates, and the impact that a shorter

term can have on total interest payments over the life of a mortgage. While the

correct response to any single question sometimes exceeded 60%, fewer than 10%

of respondents were able to answer all five basic questions correctly. Fin. Ind.

Regulatory Auth. Investor Educ. Found., Financial Capability in the United States:

Initial Report of Research Findings from the 2009 National Survey 17-18 (Dec.

2009), available at http://www.finrafoundation.org/web/groupsfoundation

/@foundation /documents/foundation/p120536.pdf. Only two-thirds of respondents

(64%) were able to correctly identify that the money in an account earning 1%

interest during a year with 2% inflation would be able to buy less than it would

today. Only one in five respondents (21%) knew that if interest rates rise, bond

prices will typically fall. Financial Capability: Initial Report, supra, at 37.

A more disturbing finding is that many defined contribution plan

participants could not reliably describe how their retirement assets were invested.

For example, 17% did not know whether the assets in their retirement plan were

9

invested in stocks or stock mutual funds, and 37% did not know whether their

assets were invested primarily in a life-cycle or target-date fund. Id. at 27-28.

2. Many employees erroneously believe employer stock is safer than other investments.

Of particular significance to this case is that 47% of respondents answered

that the statement “[b]uying a single company’s stock usually provides a safer

return than a stock mutual fund” was either true or they did not know. Id. at 40. In

contrast, most, if not all, economists would agree that an excess of employer stock

or any other single issuer’s stock is too risky and potentially devastating to a

participant’s retirement security due to the lack of diversification.

Even after Enron and Worldcom and the enactment of the Pension

Protection Act, employees still tend to own too much employer stock. E.g., Wall

Street Employee Owners Shudder As Bear Stearns Implodes, Marketwatch (Mar.

17, 2008), http://www.marketwatch.com/story/wall-street-employee-owners-

shudder-as-bear-stearns-implodes?pagenumber=2; Eleanor Laise, Despite Risks,

Workers Guzzle Company Stock, Wall St. J., Mar. 5, 2009, http://online.wsj.

com/article/SB123621 372710035183.html. Indeed, a recent research paper

showed that persons over age 55 expressed a preference for having company stock

and, depending on the manner of the question, most rejected the idea of holding a

small portion or no company stock whatsoever in their retirement plan portfolio.

See Annamaria Lusardi, Olivia S. Mitchell & Vilsa Curto, Financial Literacy and

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Financial Sophistication in the Older Population: Evidence from the 2008 HRS at

6-7 (Univ. Mich. Ret. Res. Ctr., WP 2009-216, 2009), available at http://www.

mrrc.isr.umich.edu/publications /papers/pdf/wp216.pdf. The willingness of many

plan participants to stuff their plans with their company stock notwithstanding, the

imprudence of doing so may be due to a misplaced sense of employee loyalty or a

desire to emulate the success of their corporate leaders. Andrea Coombes, U.S.

Retirement Income Deficit: $6.6 Trillion, Marketwatch (Sept. 15, 2010),

http://www .marketwatch.com/story/us-retirement-income-deficit-66-trillion-2010-

09-15. Whatever the explanation, where the employer stock crashes and

participants have not properly diversified their accounts, participants may lose not

only their jobs, but their retirement security as well.

It is beyond argument that employees who have a sizable percentage of their

retirement savings in employer stock are at excessive risk. Joe Mont, The Dangers

of Investing in Your Company Stock, Newsweek (July 9, 2010), http://www.news

week.com/blogs/jobbed/2010/07/09/the-dangers-of-investing-in-your-company-

stock.html. One investment savvy market commentator urges that it is never a

good idea to own employer stock because it involves what the investment world

calls unrewarded risk – risk that doesn’t pay off with higher returns over the long-

term. Ben Steverman, Sell Your Employer’s Stock. Now., Bloomberg

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Businessweek (March 19, 2008), http://www.businessweek.com/investing/insights/

blog/archives/2008/03/sell_your_employers_stock_now.html.

3. Many participants are not confident in their investment abilities and rely on plan fiduciaries to manage investment options prudently, loyally, and in their best interests.

It is not surprising, then, that research indicates participants lack confidence

in their abilities to select from among the investment options available to them.

Investor Perceptions, supra, at 4. In the same manner as stockholders outside of

plans feel that they must rely on investment professionals to assist them in their

investment selection, to an even greater extent are retirement plan participants

captive to the investment selection process that rests in the hands of defined

contribution plan administrators because of the far-reaching control the plan

administrator has in defining the universe of investment options available to plan

participants. Therefore, it is important that fiduciaries are held accountable for their

selection and retention of options from which participants may choose to invest.

ERISA §§ 2(b), 404(a)(1)(A), 502(a), 29 U.S.C. §§ 1001(b), 1104(a)(1)(A),

1132(a); cf. Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-43 & n.8 (1985)

(holding that ERISA was passed to prevent the misuse and mismanagement of plan

assets).

It is also well-established that in participant-directed accounts, the number

and character of investment options offered significantly affect how participants

12

allocate their assets. Olivia Mitchell & Steve Utkus, Lessons from Behavioral

Finance for Retirement Plan Design 31 (Pension Research Council of the Wharton

Sch. of the Univ. of Penn., PRC WP 2003-6, 2003), available at

http://fic.wharton.upenn .edu/fic/papers/03/0334.pdf; Jack VanDerhei, Sarah

Holden, Luis Alonso & Steven Bass, 401(k) Plan Asset Allocation, Account

Balances, and Loan Activity in 2010 at 17, 20 (Employee Benefits Research Inst.,

Issue Brief No. 366, 2011), available at http://www.ebri.org

/pdf/briefspdf/EBRI_IB_12-2011_No366_401(k)-Update.pdf. Not surprisingly,

participants hold more equity when the investment menu includes more equity

options. Plan administrators play a significant role because they select the menu of

available investment options, including whether or not to offer employer stock.

The mere offer of employer stock as an option in an employer-sponsored plan

tends to result in employees allocating a significant amount of their plan

investment to that option. Olivia S. Mitchell & Stephen P. Utkus, Company Stock

and Retirement Plan Diversification 12 (Pension Research Council of the Wharton

Sch. of the Univ. of Penn., PRC WP 2002-4, 2002), available at

https://institutional. vanguard.com/iam/pdf/CRR_company_stock.pdf (citing to

study showing plan holdings of 22 percent in employer stock where offered as an

investment option).

13

Given these studies, it appears that Congress was prescient when it enacted

ERISA and refused to provide exemptions to ERISA’s overarching fiduciary

demands of prudence and loyalty.

4. Legislative history confirms that ERISA contains no exception to the fiduciary duties of loyalty and prudence.

Both the 1974 House and Senate bills created similar general standards for

fiduciaries – the duties of prudence and loyalty. However, a major difference

between the two bills was the provision concerning self-dealing transactions. The

provision in the two bills was a mirror image. The House version generally

permitted party-in-interest transactions prohibiting only extraordinary transactions.

In contrast, the Senate bill banned all self-dealing, but exempted certain common

transactions. After Senator Jacob Javits circulated a list of various abuses that the

House bill would not regulate, the Senate version was endorsed. This resulted in

stronger fiduciary requirements concerning ESOPs, by categorically banning self-

dealing and not providing ESOPs with any exception to the general fiduciary

requirements. James A. Wooten, The Employee Retirement Income Security Act of

1974: A Political History at 257-58 (2004) .

Additional legislative history confirms that this understanding of the statute

is correct. The pertinent statutory provisions all have their origins in ERISA’s first

progenitor, H.R. Rep. No. 90-1867, at 7-8 (1968). The Committee Report

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accompanying the original House legislation explained the interaction of ESOPs,

the diversification requirement, and the fiduciary duty:

…. this proviso [exempting the diversification requirement for employer stock] is not intended to insulate such plans from other applications of the prudent man rule. Thus, if investment by a profit sharing plan in the employer is completely unsound the prudent man rule should operate to preclude such investment. All that the proviso says is that if investment in the employer is sound, no profit sharing or similar plan shall be precluded by virtue of a diversification requirement from investing part or all of the plan funds in the stock or securities of the employer to the extent the plan so requires. (emphasis added).

Id. at 7 (emphasis added).

The legislative history closer in time to ERISA’s enactment is equally

definitive. Eaves v. Penn, 587 F.2d 453, 460 (10th Cir. 1978) (“It is emphasized,

however, that even with respect to the transactions [involving employer stock]

expressly allowed, the fiduciaries’ conduct must be consistent with the prudent

man standard.”) (quoting S. Rep. No. 93-127, at 93 Cong., 1st Sess., reprinted in

1974 U.S.C.C.A.N. 4838, 4867). Nowhere in the statutory language or legislative

history did Congress indicate an exception to the prudence rules. E.g., H.R. Conf.

Rep. No. 93-1280, at 305 (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5086

(“[A]ll plan fiduciaries must act, with respect to the plan, in accordance with a

‘prudent man’ rule.”); Eaves, 587 F.2d at 460 (“the legislative history combined

with a natural and clear reading of § 404, lead to the inexorable conclusion that

ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary

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except to the extent that the standards require diversification of investments.”).

There is simply nothing in ERISA or its legislative history to show that Congress

intended to exclude investments in employer stock, even those required by the

plan, from the duty of prudence. A holding that congressional intent to encourage

employee stock ownership requires courts to permit the imprudent acquisition or

retention of employer stock cannot be squared with the statutory language and

legislative history of ERISA. Nor does it follow that Congress’s willingness to

tolerate a lack of diversification in employer stock investments suggests a

willingness to tolerate imprudent investments mandated by the plan document. If

anything, Congress showed particular concern for plans which used employer

securities by indicating that it barred the use of section 404(c) as a defense to

fiduciary breaches.2 H.R. Conf. Rep. No. 93-1280, at 305 (1974), reprinted in 1974

U.S.C.C.A.N. 5038, 5086.

This Court “must presume that a legislature says in a statute what it means

and means in a statute what it says there.” Wheeler v. Pilgrim's Pride Corp., 591

F.3d 355, 364 (5th Cir. 2009) (quoting Conn. Nat’l Bank v. Germain, 503 U.S.

249, 253–54 (1992)); see also Safety Nat'l Cas. Corp. v. Certain Underwriters at

Lloyd’s, London, 587 F.3d 714, 749 (5th Cir. 2009). A court should not disregard

2 Moreover, section 404(c), exempting fiduciaries from liability for losses caused by participants' exercise of control over assets in their individual accounts, would be superfluous if a plan sponsor could simply relieve fiduciaries from any liability for losses in an individual account. 29 U.S.C. § 1104(c); see also 29 C.F.R. § 2550.404c-1 (2007).

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the plain language of a statute unless the “apparent clarity of language leads to

absurdity of result when applied.” Safety Nat'l Cas. Corp., 587 F.3d at 750. Here,

literal application of ERISA’s language clearly furthers ERISA’s purpose of

protecting participants and beneficiaries and the financial integrity and stability of

retirement plans. See ERISA § 2, 29 U.S.C. § 1001. To hold otherwise would

create a perverse incentive for plan sponsors to disregard ERISA fiduciary

responsibilities so as to avoid ERISA’s pervasive reach and thwart its

requirements. These principles and ERISA’s plain language, applied to the facts as

alleged in the Complaint, make unmistakably clear that nothing in the statute

exempts fiduciaries of plans investing in company stock, or any other investment

for that matter, from ERISA § 404(a)’s requirements of loyalty and prudence. See

Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983) (“ESOP fiduciaries

remain subject to the general requirements of Section 404”).

II. BECAUSE PLEADING REQUIREMENTS ARE ENUMERATED IN THE FEDERAL RULES OF CIVIL PROCEDURE, “A REQUIREMENT OF GREATER SPECIFICITY FOR PARTICULAR CLAIMS IS A RESULT THAT MUST BE OBTAINED BY THE PROCESS OF AMENDING THE FEDERAL RULES, AND NOT BY JUDICIAL INTERPRETATION.”

The district court erred in creating new stricter pleading requirements based

upon the Moench presumption of prudence. This Circuit adopted the Moench

presumption of prudence in Kirschbaum v. Reliant Energy, Inc., stating that

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a fiduciary of this sort of plan is entitled to a presumption that his decision to invest in the employer's securities was prudent. A plaintiff may rebut the presumption only by showing that "owing to circumstances not known to the settlor and not anticipated by him [the making of such investment] would defeat or substantially impair the accomplishment of the purposes of the trust."

Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008) (quoting

Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995)).

Moench and Kirschbaum applied the presumption of prudence at summary

judgment, not at the pleading stage. Kirschbaum, 526 F.3d at 256; Moench, 62

F.3d at 573. This is consistent with the observation that the presumption of

prudence is often interpreted by courts as an evidentiary rule. See Moench, 62 F.3d

at 571 (recognizing the presumption as evidentiary burden shifting); Quan v.

Computer Scis. Corp., 623 F.3d 870, 883 (9th Cir. 2010) (discussing the amount of

evidence needed to rebut the Moench presumption). Other courts take different

approaches to the application of the Moench presumption. Compare Pfeil v. State

St. Bank & Trust Co., 671 F.3d 585, 593 (6th Cir. 2012) (“the presumption of

reasonableness adopted in Kuper is not an additional pleading requirement and

thus does not apply at the motion to dismiss stage”), and Difelice v. U.S. Airways,

Inc., 497 F.3d 410, 422 (4th Cir. 2007) (“ERISA itself sets forth the only test of a

fiduciary's duties”), and Griffin v. Flagstar Bancorp, Inc., 2012 U.S. App. LEXIS

15307, *10-*11 (6th Cir. 2012) (unpublished decision) (“the Kuper presumption of

prudence is evidentiary in nature and thus does not apply at the pleading stage”),

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with Lanfear v. Home Depot, Inc., 679 F.3d 1267, 1281 (11th Cir. 2012) (holding

that the Moench presumption can be applied at the motion to dismiss stage and

“prescribes who is to win in almost all of the circumstances that can be

envisioned”), and In re Citigroup ERISA Litig., 662 F.3d 128, 139 (2d Cir. 2011)

(holding that the Moench presumption applies at the pleading stage), cert pending,

and Edgar v. Avaya, Inc., 503 F.3d 340, 349 (3d Cir. 2007) (holding that plaintiff

must allege facts sufficient to overcome the Moench presumption).

The Sixth Circuit in Pfeil concluded that “a plaintiff need not plead enough

facts to overcome the presumption in order to survive a motion to dismiss.” 671

F.3d at 593 (footnote omitted) (citing Swierkiewicz v. Sorema N.A., 534 U.S. 506,

510 (2002)). In Swierkiewicz, the Supreme Court reversed the lower courts on the

basis that an evidentiary standard had been inappropriately applied to a motion to

dismiss. Id. (“Before discovery has unearthed relevant facts and evidence, it may

be difficult to define the precise formulation of the required prima facie case in a

particular case. Given that the prima facie case operates as a flexible evidentiary

standard, it should not be transposed into a rigid pleading standard for

discrimination cases.”) The Court proceeded to point out that the proper forum for

“defin[ing] disputed facts and issues and to dispos[ing] of unmeritorious claims” is

a summary judgment motion. Id. “A requirement of greater specificity for

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particular claims is a result that ‘must be obtained by the process of amending the

Federal Rules, and not by judicial interpretation.’” Id.

The Eighth Circuit further reinforced the logic behind not applying an

evidentiary standard to the pleading in Braden v. Walmart:

No matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. Thus, while a plaintiff must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition or strike suit, we must also take account of their limited access to crucial information. If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer.

588 F.3d 585, 598 (8th Cir. 2009).

CONCLUSION

For the reasons stated above, AARP respectfully submits that the district

court’s decision should be reversed and the case should be remanded for further

proceedings.

/s/Mary Ellen Signorille AARP Foundation Litigation misgnorille@aarp.org (202) 434-2060 Melvin Radowitz AARP 601 E St., NW Washington, DC 20049 Counsel for Amicus Curiae

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CERTIFICATE OF SERVICE

No. 12-10416

I hereby certify that on August 15, 2012, the Brief of Amicus Curiae AARP

in Support of Plaintiff-Appellant Urging Reversal was served via ECF on all

counsel of record.

Dated: August 15, 2012 /s/Mary Ellen Signorille

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CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

Certificate of Compliance with Type-Volume Limitation, Typeface Requirements, and Type Style Requirements

1. This brief complies with the type-volume limitation of FED. R. APP. P.

32(a)(7)(B) because this brief contains 4,215 words, excluding the parts of

the brief exempted by FED. R. APP. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of FED. R. APP. P. 32(a)(5)

and the type style requirements of FED. R. APP. P. 32(a)(6) because this brief has

been prepared in a proportionally spaced typeface using Microsoft Word in 14-

point Times New Roman. Footnotes are in 12-point Times New Roman.

Dated: August 15, 2012 /s/Mary Ellen Signorille