                            In the
 United States Court of Appeals
               For the Seventh Circuit
                         ____________

No. 03-2147
VERN STEINMAN, FLOYD SINCLAIR, and
RON EICKELSCHULTE, on behalf of themselves
and those similarly situated,
                                    Plaintiffs-Appellants,
                                v.

TERESA HICKS, et al.,
                                            Defendants-Appellees.
                         ____________
            Appeal from the United States District Court
                for the Central District of Illinois.
              No. 00-CV-3260—Richard Mills, Judge.
                         ____________
   ARGUED OCTOBER 28, 2003—DECIDED DECEMBER 12, 2003
                         ____________

  Before BAUER, POSNER, and WILLIAMS, Circuit Judges.
  POSNER, Circuit Judge.         Participants in the MMC
Employees Profit Sharing Plan brought this suit under
section 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2), against the
plan’s trustees, charging a breach of fiduciary obliga-
tion—specifically, an imprudent failure to diversify the
plan’s assets. The district judge granted summary judgment
for the defendants. 252 F. Supp. 2d 746 (C.D. Ill. 2003). There
was some confusion in the district court over whether the
suit was under section 502(a)(3) or 502(a)(2), but it is clearly
2                                                  No. 03-2147

the latter, because the plaintiffs are asking that the trustees
be ordered to make good the losses to the plan caused by
their having breached fiduciary obligations. That is relief
expressly authorized by section 409(a), 29 U.S.C. § 1109(a);
and section 502(a)(2) is by its terms the vehicle for enforcing
that section, while section 502(a)(3) is the vehicle for suits by
individuals who are seeking relief just on their own behalf
rather than on behalf of the plan. On the differences be-
tween the two subsections, see Piazza v. Ebsco Industries, Inc.,
273 F.3d 1341, 1353 n. 7 (11th Cir. 2001); Strom v. Goldman,
Sachs & Co., 202 F.3d 138, 149 (2d Cir. 1999); Wald v. South-
western Bell Corp. Customcare Medical Plan, 83 F.3d 1002,
1006 (8th Cir. 1996).
   The pension plan, created for employees of Moorman
Manufacturing Company, was an ESOP—an employee stock
ownership plan, a type of pension plan intended to encour-
age employers to make their employees stockholders. 29
U.S.C. § 1107(d)(6)(a); Tax Reform Act of 1976, Pub. L. No.
94-455, § 803(h), 90 Stat. 1590; Kuper v. Iovenko, 66 F.3d 1447,
1458 (6th Cir. 1995); Moench v. Robertson, 62 F.3d 553, 568-
69 (3d Cir. 1995); Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.
1992). In the typical such plan, the employer contributes the
stock “without charge” to a retirement plan for the employ-
ees. United States v. McCord, 33 F.3d 1434, 1440 n. 5 (5th Cir.
1994). (We use scare quotes in recognition of the fact that
there are no free lunches; any benefit that an employer
confers on an employee is reckoned by the employer as a
cost and so affects the overall level of compensation that he
is willing to pay.)
  Congress, believing employees’ ownership of their em-
ployer’s stock a worthy goal, has encouraged the creation of
ESOPs both by giving tax breaks and by waiving the duty
ordinarily imposed on trustees by modern trust law (includ-
ing ERISA, 29 U.S.C. § 1104(a)(1)(C); Etter v. J. Pease Con-
No. 03-2147                                                   3

struction Co., 963 F.2d 1005, 1010 (7th Cir. 1992); Matassarin
v. Lynch, 174 F.3d 549, 567 (5th Cir. 1999); Moench v. Robert-
son, supra, 62 F.3d at 568) to diversify the assets of a pension
plan. 29 U.S.C. §§ 1104(a)(2), 1107(a), (b)(1); Brown v.
American Life Holdings, Inc., 190 F.3d 856, 860 (8th Cir. 1999);
Kuper v. Iovenko, supra, 66 F.3d at 1458; Moench v. Robertson,
supra, 62 F.3d at 568. Since the very purpose of an ESOP is
to give employees stock in the employer, it would be
anomalous if the ESOP’s trustees were required to sell most
of the stock donated by the employer in order to create a
diversified portfolio of stocks. Retention would be perilous
if ESOPs were intended to replace traditional pension
arrangements, but they are not; they are intended to pro-
mote the ownership, partial or complete, of firms by their
employees. Susan J. Stabile, “Pension Plan Investments in
Employer Securities: More Is Not Always Better,” 15 Yale J.
Reg. 61, 69 (1998); William R. Levin, “The False Promise of
Worker Capitalism: Congress and the Leveraged Employee
Stock Ownership Plan,” 95 Yale L.J. 148, 150, 158-59 (1985).
We shall see later that Moorman’s ESOP was not the only
pension plan for its employees. (As a detail, we point out
that an ESOP, when it takes the form of a retirement plan,
does not really create a workers’ co-op, because the plan
participants include retired as well as current employees,
and their interests are not identical.) Given the nature and
purpose of an ESOP, it is no surprise that 65 percent of the
assets of the MMC Employees Profit Sharing Plan consisted
of common stock in Moorman Manufacturing Company,
with the other 35 percent being invested in mutual-fund
shares.
  In 1997, Archer Daniels Midland acquired Moorman by an
exchange of ADM common stock for the common stock of
Moorman. As a result, 65 percent of the assets of the MMC
plan now consisted of ADM stock. ADM replaced Moorman
as the plan’s sponsor and appointed new trustees, while
4                                                 No. 03-2147

Moorman’s employees were offered employment by ADM.
In its role as plan sponsor, ADM decided to terminate the
plan and allow the participants to join ADM’s pension
plans; ADM has its own ESOP, plus (it appears—the record
is somewhat unclear, but we do not understand the plain-
tiffs to be contesting the point) a conventional defined-
benefit retirement plan. At termination the assets of the
Moorman plan originally were to be distributed to the
participants in cash. But upon acquiring Moorman ADM
amended the plan to authorize each participant to choose
whether to take the distribution in the form of cash, or ADM
stock, or to roll it over into ADM’s ESOP or into an IRA.
   The distribution could not occur, however, until the plan
was terminated. As is customary, ADM made termination
contingent on receiving a favorable tax ruling from the IRS.
It took 18 months to get the ruling, longer than usual but
only because the IRS conducted a random audit of the plan.
During the 18-month period the price of ADM stock fell by
almost a third. The plaintiffs argue that the plan’s trustees,
knowing the plan would not be terminated until the IRS
issued its ruling, which was likely to take at least a year and
maybe (as happened) more, should at the outset have sold
all the stock held by the plan and invested the proceeds in
fixed-income securities, in order to protect the participants
against the risk that while the plan remained in effect the
price of ADM stock would fall. Implicit in the plaintiffs’
argument is that at the very least the trustees should have
sold as much ADM stock as necessary to enable the plan to
acquire a diversified portfolio of stocks. The former route
would have protected the plan’s participants from swings
in the stock market, the latter from swings in ADM stock.
  Of course, the upside would have been truncated along
with the downside; if ADM did better than the stock or
bond markets—and no one could know at the time of the
No. 03-2147                                                   5

acquisition of Moorman what the future held for ADM—
then the participants in the Moorman plan would be better
off as a result of the trustees’ retaining the ADM stock. But
assuming that the plan’s participants were risk averse, a
truncated distribution of expected returns would have been
preferable ex ante (that is, when the trustees’ decision to
hold onto the ADM stock was made), as well as ex post (we
know that ADM’s stock fell by more than the stock market
as a whole and the market for fixed-income securities as
well), even if the average of those returns would be no
higher or even somewhat lower. Risk-averse people will pay
to avoid risk, as they do when they buy insurance knowing
that an insurance premium includes a loading charge (that
is, a fee to compensate the insurance company for its
administrative expenses) on top of the estimate of the loss
to the insured discounted by the probability that the loss
will occur. That discounted loss would be the actuarial
value of the policy, and a risk-neutral person would pay no
more. In fact he would never buy insurance, because there
is always a loading charge. Most people are assumed to be
risk averse when it comes to investing for retirement
because they will have limited alternative sources of income
once they stop working. The participants in a pension plan
are the investors even if the employer alone contributes to
the plan, since, as we mentioned, there is no free lunch. An
employer who had no pension obligations would pay his
employees higher wages, and they would then make their
own arrangements for retirement.
  From the presumed risk aversion of employees with
regard to their retirement income follows the duty of a pen-
sion fund’s trustees to diversify the fund’s assets; for risk is
reduced by diversification. “Because the value of any single
stock or bond is tied to the fortunes of one company,
holding a single kind of stock or bond is very risky. By con-
trast, people who hold a diverse portfolio of stocks and
6                                                  No. 03-2147

bonds face less risk because they have only a small stake
in each company.” N. Gregory Mankiw, Principles of
Economics 546 (1998); see also Stephen B. Cohen, “The
Suitability Rule and Economic Theory,” 80 Yale L.J. 1604,
1634 (1971). In other words, if one holds stocks whose price
behavior is uncorrelated or at least not perfectly correlated,
the variance of the portfolio will be less than the variance of
individual stocks. The Modern Theory of Corporate Finance 6
(Clifford W. Smith, Jr., ed., 2d ed. 1990). Fixed-income
securities exhibit less variance, hence less risk, than stock. In
both cases the variance avoided is greater the shorter
the investment horizon. Someone who is going to have to
sell stock in a month risks having to sell at a market low,
whereas if he can defer the sale indefinitely he is less likely
to be hurt because the long-run trend of stock prices is
upward.
   The MMC Employees Profit Sharing Plan both was
underdiversified and had a very short investment horizon
once ADM decided to terminate it. But these things do not
demonstrate imprudence in the management of an ESOP, at
least on the basis of the record compiled in the district court,
which is all we have to go on. When ADM acquired
Moorman the plan was underdiversified, what with 65
percent of its assets consisting of stock in the Moorman
company. Yet there is no suggestion that the trustees were
imprudent before the acquisition in holding such an unbal-
anced portfolio, because that is a form of “imprudence”
expressly authorized for ESOPs. If ESOPs had to be diversi-
fied they would fail in their purpose of encouraging employ-
ees’ ownership of their employer’s stock. Imagine if the
MMC plan had owned the same proportion of Moorman
stock as the proportion of that stock in all stock traded on all
major exchanges here and abroad—an infinitestimal
percentage.
No. 03-2147                                                 7

  Thus, had the acquisition not occurred, 18 months later
the plan participants would have been in the same position
as before, holding shares in a severely underdiversified
plan. Instead they found themselves holding shares in a no
more severely underdiversified plan and indeed one less
exposed to a type of risk that we have not yet mentioned—
the risk of bankruptcy, which was greater for Moorman
than for the giant ADM. For all we know, the market forces
that dragged down the price of ADM stock during the 18-
month period between termination and distribution would
have dragged Moorman over the brink had it not been
acquired.
  ADM could, moreover, without courting an accusation
of imprudence, have made a “trust to trust” transfer,
whereby the assets of the MMC plan, consisting after the
acquisition mainly of ADM shares as we know, would sim-
ply have been poured into ADM’s ESOP. Hunter v. Caliber
System, Inc., 220 F.3d 702, 718-19 (6th Cir. 2000); Kuper v.
Iovenko, supra, 66 F.3d at 1456-57; see also Sengpiel v. B.F.
Goodrich Co., 156 F.3d 660, 665-67 (6th Cir. 1998); Blaw Knox
Retirement Income Plan v. White Consolidated Industries, Inc.,
998 F.2d 1185, 1189-90 (3d Cir. 1993). As these cases (one of
which, Kuper, involved an ESOP) explain, a decision to
transfer trust funds from one trust to another, which is a
typical incident of a corporate merger or reorganization, is
not a fiduciary act. The trust funds themselves remain in-
tact, and the new trustees are fully subject to the fiduciary
duties that the law imposes on trustees. ADM might well
have done this. The participants would have swapped
shares in a small company (Moorman) for shares in a giant
(ADM), and so would have been better off from an ex ante
perspective: if one had asked the participants in the MMC
plan, would you rather have Moorman shares or ADM
shares, undoubtedly they would have said ADM shares.
8                                                 No. 03-2147

Certainly this would be true of risk-averse investors, and, as
we said, most investors for retirement are risk averse.
  The procedure followed by ADM achieved the same
result—assuming that the relevant terms of the two plans
are the same. If ADM’s ESOP plan is easier to cash out of
than the MMC ESOP plan, a trust-to-trust transfer might
actually have reduced the risk borne by participants in the
latter plan compared to the procedure adopted because any
cash that a participant gets his hands on he can invest in a
diversified portfolio of stocks, or for that matter in fixed-
income securities; and the sooner he gets the cash, the
sooner he can take these measures of self-protection. But
there is no evidence that ADM’s ESOP plan is easier to cash
out of than the MMC plan—the ADM plan is not in the
record—and the plaintiffs bore the burden of proof. They
also failed to introduce evidence of the overall risk created
by the retirement package that they acquired when they
became employees of ADM.
  Some didn’t become employees of ADM. But it seems that
they remained participants in a Moorman defined-benefit
plan, as well as in the MMC plan at issue in this case. Those
Moormanites who did go with ADM also, as we noted
earlier, became participants in what we believe is a conven-
tional defined-benefit plan. (In addition, Moorman had a
401(k) plan that rolled over into a similar plan of ADM’s.)
We do not know all the terms of these plans or what they
were worth to the participants. But for all that appears, the
shares of ADM that loom so large when only the MMC
ESOP plan is considered represent only a small part of the
participants’ overall holdings. It is conceivable that taken as
a whole the plaintiffs’ retirement assets are adequately
diversified and that—a related point—the fact that some of
them have a short time horizon is not a hardship. It was the
plaintiffs’ burden to show the contrary.
No. 03-2147                                                  9

  One can imagine a situation in which a trust-to-trust
transfer, or the similar-seeming substitute at issue in this
case, would trigger a duty of sale on the part of the trustees,
even in the ESOP context where there is no duty to diversify
as such. There is still a duty of prudence. 29 U.S.C. §
1104(a)(1)(B); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915,
917, subsequent appeal, 61 F.3d 599 (8th Cir. 1995); Fink v.
National Savings & Trust Co., 772 F.2d 951, 955 (D.C. 1985);
Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983);
Eaves v. Penn, 587 F.2d 453, 460 (10th Cir. 1978). And in
particular cases it might, as pointed out in In re Hemmeter,
242 F.3d 1186, 1191 n. 2 (9th Cir. 2001); Kuper v. Iovenko,
supra, 66 F.3d at 1458, and Moench v. Robertson, supra, 62
F.3d at 568, become a duty to diversify, even though failure
to diversify an ESOP’s assets is not imprudence per se, 29
U.S.C. § 1104(a)(2), as that would bring in the duty to
diversify by the back door.
  Suppose that all or most of the plan participants were just
18 months short of retirement (in fact the average age of the
participants in the MMC plan was only 45), the ESOP was
their principal retirement asset (we don’t know whether it
was or not) and was entirely invested in the stock of their
employer (but here it was 65 percent, not 100 percent), and
their employer was bought in a stock-for-stock deal—so that
all the assets of the ESOP became stock in the acquirer—by
a company that had a much higher debt-equity ratio than
their (former) employer and as a result its stock price was
much more volatile and its bankruptcy risk greater. Then,
even if the trustees did not predict the company’s “impend-
ing collapse” (Moench v. Robertson, supra, 62 F.3d at 572),
they might be required in the interest of the participants
either to diversify the plan’s stockholdings or to exchange
the ADM stock for Treasury bills. But the plaintiffs did not
attempt to show that this is such a case.
                                                   AFFIRMED.
10                                            No. 03-2147

A true Copy:
       Teste:

                       _____________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




                USCA-02-C-0072—12-12-03
