Please ensure Javascript is enabled for purposes of website accessibility

ERISA Plan Fiduciaries May Face Personal Liability

Deborah Elkins//August 5, 2014

ERISA Plan Fiduciaries May Face Personal Liability

Deborah Elkins//August 5, 2014

Participants in a 401(k) plan before and after defendant separated its Reynolds tobacco business from its Nabisco food company and plan fiduciaries forced divestment of company stock proved that defendants breached their ERISA fiduciary duty of procedural prudence, and the 4th Circuit remands the case for the district court to apply the correct standard to evaluate plaintiffs’ losses; but a dissenting judge says no one will want to serve as a plan fiduciary if they face the personal liability made possible by the majority view.

Plaintiff Richard Tatum and other participants in 401(k) retirement plans sued R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings Inc. for breach of ERISA fiduciary duties, alleging they liquidated two funds held by the plan on an arbitrary timeline without conducting a thorough investigation, thereby causing a substantial loss to the plan.

The district court found that RJR did indeed breach its fiduciary duty of procedural prudence and bore the burden of proving this breach did not cause loss to plan participants. But the court concluded RJR met this burden by showing that a reasonable and prudent fiduciary could have made the same decision after performing a proper investigation.

We affirm the district court holding that RJR breached its duty of procedural prudence and bore the burden of proof as to causation. But because the court then failed to apply the correct legal standard in assessing RJR’s liability, we reverse its judgment and remand the case for further proceedings.

In March 1999, 14 years after the merger of Nabisco and R.J. Reynolds Tobacco into RJR Nabisco Inc., the merged company decided to spin off its tobacco business, Reynolds, from its food business, Nabisco, to lessen the taint of tobacco litigation on Nabisco’s stock price. Prior to the spinoff, RJR Nabisco sponsored a 401(k) plan with six fully diversified funds and two company stock funds – Nabisco Common Stock Fund and RJR Nabisco Common Stock Fund. After the spinoff, the RJR Nabisco Common Stock Fund was divided into two separate funds: Nabisco Group Holdings Common Stock Fund, or Nabisco Holdings, with stock from the food business; and RJR Common Stock Fund, with stock from the tobacco business. The 401(k) plan at issue here, created June 14, 1999, the date of the spinoff, expressly provided for the retention of the Nabisco Funds as “frozen” funds in the plan. Notwithstanding the requirement in the governing plan document that the Nabisco Funds remain as frozen funds in the plan, RJR determined to eliminate them from the plan. In the months immediately following the June 1999 spinoff, the Nabisco Funds declined sharply in value. In October 1999, RJR sent a letter to plan participants erroneously informing them that the law did not permit the plan to maintain the Nabisco Funds. Plaintiff Richard Tatum protested the forced sale, and was told nothing could be done to stop the divestment. Between June 14, 1999, the day after spinoff and Jan. 31, 2000, the market price for Nabisco Holdings stock had dropped by 60 percent and the price for Nabisco Common Stock had dropped by 28 percent. A few months after the divestment, the stock began to rise in value. As of Dec. 11, 2000, share prices showed an increase of 247 percent for Nabisco Holdings stock and 82 percent for Nabisco Common Stock. In May 2002, Tatum filed this class action.

The district court found there was no evidence – documentation or testimony – of any process by which fiduciaries investigated, analyzed or considered the circumstances regarding the Nabisco stocks and whether it was appropriate to divest. The court found it was clearly improper for the fiduciaries to consider their own potential liability as part of the reason for not changing course of their decision to divest the plan of Nabisco stocks. The district court concluded the lack of effort on the part of those considering removal of the Nabisco Funds – from March 1999 until the stock was removed from the plan on Jan. 31, 2000 – compelled a finding that the RJR decision makers in this case failed to exercise prudence in deciding to eliminate the Nabisco Funds from the plan. The district court’s extensive and careful factual findings were well supported by record evidence. The court also did not err in requiring RJR to prove that its imprudent decision making did not cause the plan’s loss.

We, like our sister circuits, have adopted the “would have” standard to determine a fiduciary’s objective prudence. RJR maintains that even if the district court erred in applying the “could have” standard rather than the “would have” standard, the error was harmless. We disagree. The “would have” standard is, of course, more difficult for a defendant fiduciary to satisfy.

We cannot hold the district court’s error in adopting the “could have” standard was harmless when the governing plan document required the Nabisco Funds to remain as frozen funds in the plan. Particularly given the extraordinary circumstances surrounding RJR’s decision to divest the Nabisco Funds, including the timing of the decision and the requirements of the governing plan document, we must conclude that application of the incorrect legal standard may ache influenced the court’s decision.  On remand, the district court must review the evidence to determine whether RJR has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision.

Affirmed in part, vacated in part, reversed in part and remanded.


Wilkinson, J.: This court, breaking new ground, reverses the district court. I do not believe ERISA allows plan fiduciaries to be held monetarily liable for prudent investment decisions, and especially not those made in the interest of diversifying plan assets. The statutory remedy for a breach of procedural prudence that precedes a reasonable investment decision includes, explicitly, the removal of plan fiduciaries. The majority goes much further, forcing fiduciaries to face the prospect of personal monetary liability instead.

The majority all but directs a finding of personal liability on remand. To impose personal monetary liability upon fiduciaries for prudent investment decisions made in the interest of asset diversification makes no sense. What this decision will lead to is litigation at every stage behind reasonable investment decisions by ERISA-plan fiduciaries. Who would want to serve as a fiduciary given this kind of sniping?

Tatum v. RJR Pension Investment Committee (Motz) No. 13-1360, Aug. 4, 2014; USDC at Greensboro, N.C. (Tilley) Catha Worthman for appellant; Adam H. Charnes for appellees. VLW 014-2-147, 85 pp.

Verdicts & Settlements

See All Verdicts & Settlements

Opinion Digests

See All Digests