Tatum 'Reverse Stock-Drop' Case Has Important Lessons For Employers And Fiduciaries

Employers and ERISA fiduciaries are painfully aware of the litigation in the past few years asserting breach of fiduciary duty for not selling company stock held by a retirement plan soon enough to avoid losses. Now we have a case in which plan fiduciaries are taken to task for selling such stock too quickly, resulting in the plan's missing out on windfall gains. Tatum v. RJR Pension Inv. Comm., 2014 U.S. App. LEXIS 14924 (4th Cir. Aug. 4, 2014), offers insights into making decisions about changes to investments in 401(k) plans. Tatum involved the decision-making process for the elimination of a company stock fund following a corporate spin-off but has broader implications for employers and fiduciaries who select investments for their retirement plans.

In Tatum, the U.S. Court of Appeals for the Fourth Circuit reversed a lower court judgment in favor of R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc. (collectively, RJR) and their 401(k) plan committees. The court of appeals found that the district court applied the wrong legal standard for determining whether the defendants' breach of the ERISA fiduciary duty of procedural prudence resulted in losses to the RJR 401(k) plan and remanded the case to the district court for further proceedings.

Background

In 1999, RJR Nabisco, Inc. (RJR Nabisco) decided to spin off its tobacco business (which became RJR) from its Nabisco food business. The primary stated purpose was to reduce the negative impact that tobacco litigation was having on RJR Nabisco's stock price. Before the spin-off, RJR Nabisco sponsored a 401(k) plan. The RJR 401(k) plan at issue in Tatum (the New Plan) was created by a spin-off from the RJR Nabisco plan.

Immediately after the spin-off, the New Plan continued to offer most of the investment funds that were offered under the RJR Nabisco plan. The New Plan expressly provided for the retention of two Nabisco single-stock funds as "frozen" funds in the New Plan (the Nabisco Funds), meaning that participants could retain existing investments in the Nabisco Funds but could not make additional investments in those funds.

Following the spin-off, a "working group" of RJR employees (but not the New Plan committees responsible for investment selections) decided to eliminate the Nabisco Funds from the New Plan and selected a divestment timeline of six months. However, the working group (1) had no authority or responsibility under existing New Plan documents; (2) spent only 30 to 60 minutes discussing what to do with the Nabisco Funds; and (3) could not later explain how six months was determined as the appropriate divestment timeline.

Although one of the New Plan committees apparently adopted the working group's recommendation to remove the Nabisco Funds, there was no evidence that the committee met, discussed or voted on the issue or otherwise signed a required consent in lieu of a meeting authorizing an amendment to eliminate the Nabisco Funds. The purported amendment that would have eliminated the Nabisco Funds was found to be invalid, as it was not properly adopted. If there had been a properly-adopted New Plan amendment directing the appropriate New Plan fiduciaries to eliminate the Nabisco Funds by a specified date:

the amendment would have been a "settlor" act not subject to ERISA fiduciary duties; and the subsequent elimination of the Nabisco Funds in accordance with the amendment would have been a fiduciary act only to the extent that discretion was involved as to when and how the funds would be...