Tatum v. RJR Pension Inv. Comm., 2017 WL 1531578 (4th Cir. 2017)
The Fourth Circuit has issued a third opinion in this long-running litigation over stock funds that were liquidated at a substantial loss. The case was brought by a 401(k) plan participant who claimed that the plan’s sponsor and its holding company did not act prudently when they eliminated two single-stock funds holding the shares of a spun-off business. Earlier, the trial court found that the plan fiduciaries had failed to exercise prudence in deciding to eliminate the funds, but their failure did not cause the plan’s losses because a hypothetical prudent fiduciary could have made the same decision (see our Checkpoint article). The Fourth Circuit rejected the “could have” standard and returned the case to the trial court to determine whether a prudent fiduciary “would have” reached the same result (see our Checkpoint article). Applying that higher standard, the trial court again concluded that the fiduciaries’ faulty process did not cause the plan’s losses (see our Checkpoint article). The participant appealed.
In its latest opinion, the Fourth Circuit rejects various objections to the trial court’s decision. The court dismisses the notion that divestment decisions must satisfy a higher legal standard than investment decisions, and explains that the applicable standard of proof does not require that all of the evidence favor the divestment decision. Regarding the divestment’s timing, the court finds no error in the trial court’s rejection of testimony by the participant’s expert, who relied heavily on analyst recommendations that other testimony showed were unreliable. Finally, the court examines the significance of the “efficient market hypothesis” in light of the U.S. Supreme Court’s Fifth Third decision (see our Checkpoint article). The court notes that an efficient market allows fiduciaries to prudently rely on the market price as the best estimate of a stock’s value, but a reliable price does not preclude fiduciaries from divesting on the basis of public information about risk. An efficient market does not capture additional factors that fiduciaries must consider, such as a plan’s goals or ERISA’s fiduciary duties. In this case, the risk inherent in the fund’s lack of diversity, the stock’s high correlation with another volatile stock, and the low expected returns reflected in the stock price reasonably supported the trial court’s decision, and were consistent with Fifth Third.
EBIA Comment: This case demonstrates that the “would have” standard for showing that a plan fiduciary’s breach did not cause a loss is difficult, but not impossible, to satisfy. Making a prudent choice by an inadequate process, however, is just lucky. Plan fiduciaries are on much safer ground when they establish and carefully follow a prudent process. Process is also crucial when adopting plan amendments, a point highlighted by the dissent, which (among other things) faults the trial court for its handling of the fiduciaries’ failure to properly adopt an amendment to eliminate the stock funds. The court majority overlooks that obstacle, noting that the plan document cannot “trump the duty of prudence,” but there seems little doubt that proper adoption of the amendment requiring divestment would have helped the fiduciaries’ case. For more information, see EBIA’s 401(k) Plans manual at Sections XXV.H.6 (“Potential Fiduciary Liability for Investments in Employer Stock”), XXV.H.10 (“Eliminating an Employer Stock Fund”), XXVII.D (“Procedures for Amending a Plan”), and XXXVIII.I (“Mergers and Acquisitions: Fiduciary Duties During the Transaction”). And if you work with fiduciary issues, you may be interested in our upcoming webinar “401(k) Fiduciary Rules: What’s New and What’s Next?” (live on 7/26/17).
Contributing Editors: EBIA Staff.