Fourth Circuit Adds Even More Complexity to Benefit Plan Fiduciaries' Role

The U.S. Supreme Court’s recent Dudenhoeffer decision demonstrated that benefit plan fiduciaries are definitely in the litigation spotlight, and that they should exercise caution to avoid fiduciary liability in garden-variety “stock drop” cases, where fiduciaries fail to monitor and/or eliminate employer stock as an investment choice that is underperforming. A new decision from the Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina), Tatum v. RJR Pension Investment Committee, shows that fiduciaries should be equally concerned over liability in what could be called “stock rise” cases, where fiduciaries fail to apply the appropriate level of procedural prudence when deciding to eliminate an investment option that happens to increase in value at a later date.

As a result of the spin-off of the R.J. Reynolds Tobacco Company (RJR) from Nabisco, a RJR 401(k) plan was spun off from the 401(k) plan of the formerly combined entities. The new RJR plan offered Nabisco stock as a frozen investment option to plan participants. When the decision was later made to eliminate that investment option, the plan document was not amended to reflect that decision. It also appears that the proper procedure described in the relevant documents was not followed by the fiduciaries, and that most of the discussions leading to that decision actually took place among individuals who were not plan fiduciaries. After elimination of that investment option, the Nabisco stock substantially increased in value, which caused the plaintiff to file a lawsuit as a plan participant who had invested his retirement savings in that investment choice, and lost value as a result of the decision to eliminate that option.

Given that the plaintiff could demonstrate that the fiduciaries did not act in a manner that was procedurally prudent, the Fourth Circuit held that the burden of proof shifted to the fiduciaries to prove that the breach of their duty did not cause the claimed loss to the participant. Specifically, the court stated that the fiduciaries had to show that a prudent fiduciary would have made the same decision. The Fourth Circuit reversed the district court decision, and specifically rejected a standard that found in favor of the fiduciaries because they could prove that a prudent fiduciary could have made the same decision.

This subtle difference may have significant practical consequences for fiduciaries, and could increase their exposure for breach of fiduciary duty. It may ultimately be overturned based on a number of factors, including its consistency with the Dudenhoeffer decision. However, it is certain that none of these legal issues would have arisen if the procedures set forth in the plan documents had been followed by the fiduciaries. Following these procedures would have demonstrated that the fiduciaries acted prudently, and as a result, the burden of proof would have remained on the plaintiffs to show improper investment decisions.

Topics:  Benefit Plan Sponsors, Employee Benefits, ESOP, Fiduciary Duty, FIfth Third Bancorp v Dudenhoeffer, Popular, SCOTUS, Stock Drop Litigation, US Bancorp

Published In: Civil Procedure Updates, General Business Updates, Finance & Banking Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Parker Poe Adams & Bernstein LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »