United States: Tatum V. R.J. Reynolds Tobacco Co., Et Al.: Real Implications For ERISA's "Hypothetical Prudent Fiduciary" Standard

Overview

On February 25, 2013, the U.S. District Court for the Middle District of North Carolina issued an opinion and final judgment ruling in favor of defendant R.J. Reynolds Tobacco Company ("RJR") in a nationwide class action asserting breach of fiduciary duty pursuant to ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), based on RJR's removal of two non-employer, single-stock investment funds from the company's 401(k) plan. See Tatum v. R.J. Reynolds Tobacco Co., __ F. Supp. 2d __, 2013 WL 692832 (M.D.N.C. Feb. 25, 2013). The decision by the Honorable Judge N. Carlton Tilley, Jr. significantly impacts ERISA's "hypothetical prudent fiduciary prong," which is applied under either the "substantive prudence" or causation analyses for breaches of fiduciary duty. In "stock-drop" cases, courts typically approach the burden of persuasion and standard for substantive/prudence in one of two ways—placing the burden on the plaintiff to prove that a hypothetical prudent fiduciary "would have" eliminated the suspect funds from the plan at a particular time; or placing the burden on the defendant to prove that a hypothetical prudent fiduciary "would not have" eliminated the suspect funds at that time. The court in Tatum, however, applied a "could have" standard for substantive prudence/causation because it found credible evidence at trial that a hypothetical prudent fiduciary could have either eliminated or retained the investment funds at issue. Ultimately, the court held that RJR's decision was objectively prudent: "RJR has satisfied its burden of establishing at trial that its actions were not imprudent and a hypothetical prudent fiduciary could have decided to eliminate the [investment funds] on January 31, 2000."

Application

This case has application whenever a company with employer stock in a 401(k) spins off a subsidiary and must determine what to do with the formerly-employer stock in the subsidiary plan. It also has implications for claims for fiduciary breach under ERISA where fiduciaries choose between two or more prudent investment options, such as where fiduciaries make a discretionary decision to add one of a number of prudent investment funds, substitute one prudent investment fund for another prudent fund, or remove what may be a violatile, yet prudent, investment option to protect participants from the risk of large losses to their retirement savings.

Background and Opinion

The suit stemmed from a decision made in 1999 by RJR Nabisco Holdings Corp., subsequently renamed Nabisco Group Holdings Corp. (NGH), to spin off RJR, thereby separating NGH's tobacco business and food business. As part of the spin-off, the 401(k) plan for the previously related entities had to be divided into two separate plans for the now-separate tobacco and food businesses. The plaintiff contended that RJR, its holding company, and two administrative committees (later dismissed) breached their fiduciary duty of prudence to participants of the RJR 401(k) plan when the defendants removed the stock funds of the companies involved in the food business, NGH and Nabisco Holdings Corp. (NA), as investment options from the RJR 401(k) plan approximately six months after the spin-off. Within a year after the divestment, both the NGH and NA stocks appreciated significantly. Plaintiff sought class-wide damages of well over $50 million, claiming as damages the lost appreciation denied them by the divestment of the NGH and NA stock funds (together, "the Nabisco Funds").

Although it was RJR's belief at the time that the elimination of the Nabisco Funds through Plan amendment was a settlor act to which no fiduciary duties applied—thereby requiring no minimum investigation, analysis, or procedure—the court found that the elimination was fiduciary in nature. It then held that RJR breached its fiduciary duties of procedural prudence when it decided to remove the Nabisco Funds from the RJR 401(k) plan without undertaking a proper investigation into the prudence of its decision.

Despite this finding, the court correctly noted that the plaintiff could only prevail if "the breach actually caused a loss to the plan." This required a showing that the decision was not reasonable under the circumstances, which is often referred to as "substantive prudence." Other courts consider this an issue of causation—if the decision was substantively prudent then any breach of procedural prudence cause no injury. The court first held that RJR had the burden to prove that its decision to divest the Nabisco Funds was objectively prudent. It then found that RJR readily satisfied that burden. The court based this holding on RJR's evidence that: a single stock fund carries significantly more risk than a diversified fund; the Nabisco Funds themselves were inherently risky investments due to potential tobacco-related liability, which therefore increased risk for the Plan participants; analyst reports during 1999-2000 regarding the Nabisco Funds would not compel a decision to maintain those funds in the Plan; the stock appreciation after divestment was neither expected nor foreseeable; and plaintiff's evidence of what other plans were doing was "highly questionable" and not persuasive as to what RJR should have done. In light of all these considerations, the court found that "RJR has satisfied its burden of establishing at trial that its actions were not imprudent and a hypothetical prudent fiduciary could have decided to eliminate the Nabisco Funds on January 31, 2000."

Analysis

This case is unique in a number of ways. It is not a "stock-drop" case where plan participants are suing for fiduciary breach for failure to eliminate employer funds from an ERISA plan when the employer company is on the brink of financial disaster. By contrast, Tatum contended that the Nabisco Funds—non-employer, single stock funds—should have been retained in RJR's 401(k), even though the stocks were dropping significantly in value prior to their elimination from the Plan and were inherently risky. Thus, where plan participants typically seek to recover actual "losses" to their plan investments, Tatum's "losses" were the Nabisco Fund's unforeseen post-divestment appreciation in value.

With regard to procedural prudence, this case also varies from others in that here the court found "fiduciaries" employees who believed they were acting as settlors. Rarely is this seen, even though courts tend to blur the lines between settlor and fiduciary acts. Here, because the Nabisco Funds were believed and intended to be eliminated by plan amendment, which requires no minimum investigation, analysis, or procedure, the acting employees naturally checked off fewer of the procedural requirements. Few cases of fiduciary breach address this type of inadvertent imprudence, free of claims of self-interest or true disregard for a fiduciary's duties.

Despite the distinctiveness in the case, Tatum has real implications for ERISA's "hypothetical prudent fiduciary" standard in certain scenarios. The case addresses for the first time the standard for substantive prudence or causation when those held to be fiduciaries are faced with an investment decision between two or more prudent choices. In most cases of fiduciary breach, such as in the stock-drop context, there is a bright line between prudent and imprudent actions, thus the "would have" standard makes sense. But the "could have" standard adopted by the court in this case is the appropriate standard where fiduciaries make a discretionary decision to add one of a number of prudent investment funds, substitute one prudent investment fund with another prudent fund, or, like in Tatum, remove what may be a violatile, yet prudent investment option from a plan to protect participants from the risk of large losses to their retirement savings. In cases such as these, the application of the "could have" standard is necessary to prevent expanded liability against fiduciaries who make the right substantive decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.