The ERISA Litigation Newsletter - September 2014

EDITOR'S OVERVIEW

As the summer draws to a close, no one would fault you if you missed the Fourth Circuit's decision in Tatum v. RJR Pension Investment Committee, which was published on August 4th. However, plan sponsors and fiduciaries should take note of it. As explained below in the article by Myron Rumeld and Russell Hirschhorn, in a 2-1 decision, over a blistering dissent, the Fourth Circuit made a number of significant rulings on the burdens of proof related to loss causation, the meaning of "objective prudence," and the standards for reviewing decisions pertaining to stock funds in the wake of the Supreme Court's ruling in Fifth Third v. Dudenhoeffer, many of which are difficult to reconcile with existing case law. We already know that the Circuit has denied RJR's petition for rehearing en banc. It remains to be seen whether RJR will petition for review by the Supreme Court.

As always, please be sure to review the section on Rulings, Filings, and Settlements of Interest. This month we cover Revenue Procedures that provide guidance to individuals on their obligation to maintain minimum essential coverage under the Affordable Care Act's "individual mandate," new guidance on locating missing participants for terminated defined contribution plans and ERISA section 510 retaliation claims.

DIVIDED FOURTH CIRCUIT PANEL RULES ON BURDEN OF PROVING LOSS CAUSATION IN ERISA FIDUCIARY BREACH CASE

By Myron Rumeld and Russell Hirschhorn

"As for those who might contemplate future service as plan fiduciaries, all I can say is: Good luck."

That was the sentiment expressed in a blistering dissent by Fourth Circuit Judge J. Harvie Wilkinson in the latest ruling in a lawsuit challenging the decision by the fiduicaries of the RJR 401(k) plan to liquidate two stock funds that previously had been available to plan participants wishing to invest in Nabisco stock. Tatum v. RJR Pension Inv. Committee et al., No. 13-1360, 2014 WL 3805677 (4th Cir. Aug. 4, 2014). In a split decision, the panel ruled that, because plaintiff-participant Richard Tatum had proved that the plan fiduciaries acted imprudently by liquidating the stock fund without the benefit of a proper investigation, the burden of proof shifted to defendants to show that a prudent fiduciary would have made the same decision. In so ruling, the Court reversed the lower court decision, which had found in favor of defendants after a bench trial upon finding that they had demonstrated that a prudent fiduciary could have made the same decision.

The Fourth Circuit's decision makes a number of significant statements and rulings on the burdens of proof related to loss causation, the meaning of "objective prudence," and the standards for reviewing decisions pertaining to stock funds in the wake of the Supreme Court's ruling in Fifth Third v. Dudenhoeffer. Some of the Court's pronouncements are difficult to reconcile with existing case law. If not set aside on en banc or Supreme Court review and if adopted elsewhere, the decision could substantially impact the future conduct of fiduciary breach litigation, as well as plan practices in administering stock funds.

Background

For many years, RJR Nabisco—the product of the merger of Nabisco and R.J. Reynolds Tobacco—sponsored a 401(k) plan, which consisted of six diversified funds and two undiversified funds:

The Nabisco Common Stock Fund, consisting of stock in the food business, and The RJR Nabisco Common Stock Fund, consisting of stock in the food and tobacco businesses. In March 1999, the merged company decided to spin off its tobacco business, R.J. Reynolds, from its food business, Nabisco. The decision was prompted by R.J. Reynolds' exposure to tobacco litigation and the negative effect it was having on the company's stock price—a phenomenon referred to as the "tobacco taint."

The 401(k) plan at issue (the "Plan") was created on the date of the spin-off by RJR for the benefit of RJR employees. The Plan designated a benefits committee as being responsible for making Plan amendments, and an investment committee as being responsible for Plan investments. For simplicity's sake, these committees and RJR are collectively referred to as "RJR."

After the spin-off, the RJR Nabisco Common Stock Fund was divided into two separate funds:

Nabisco Group Holdings Common Stock Fund, consisting of stock in the food business, and RJR Common Stock Fund, consisting of stock in the tobacco business As a result of the spin-off, the Plan had two funds holding Nabisco stock: the Nabisco Common Stock Fund and the Nabisco Group Holdings Fund (the "Nabisco Funds"). The Plan provided for the retention of the Nabisco Funds as "frozen" funds in the Plan. The Plan also retained the six diversified funds offered in the pre-spin-off plan, as well as the RJR Common Stock Fund. Thus, as a result of the spin-off, the Plan maintained an investment option that consisted of investments in a single, non-employer (Nabisco) stock.

Notwithstanding the Plan language providing that the Nabisco Funds remain as frozen funds in the Plan, RJR decided to eliminate them from the Plan because it was concerned that having funds that were invested in a single, non-employer stock could expose it to a breach of fiduciary duty suit based on a failure to diversify the fund. According to the majority's opinion, the decisions to freeze and then liquidate the Nabisco Funds were made at a meeting by a working group consisting of RJR employees who had no authority under the Plan that lasted no longer than one hour. The group discussed: (a) reasons for removing the Nabisco Funds, including what it perceived to be the high risk of having a single, non-employer stock fund in the Plan; (b) its belief that these type of investment funds were only held in other companies' plans as frozen funds in times of transition, i.e., for a short period after the spin-off; and (c) its belief that a single stock fund in the Plan would add complexity and cost. The group's recommendation was reported back to a member of the Plan's fiduciary committees, who agreed with the working group's recommendation.

RJR subsequently notified Plan participants that the Nabisco Funds would be eliminated from the Plan as of January 31, 2000. A few days before the scheduled spin-off, Tatum emailed members of the Plan committees and asked them not to go through with the elimination of the Nabisco Funds because it would result in a 60% loss to his account. Tatum explained that he wanted to wait for the stock price to increase before selling his stock and that the company had been "optimistic" that the share price would increase after the spin-off. Tatum was told that the...