EBIA Weekly Newsletter

Tatum Reconsidered: No Fiduciary Liability Under Fourth Circuit’s Higher Objectively Prudent Standard

   March 3, 2016

Tatum v. R.J. Reynolds Tobacco Co., 2016 WL 660902 (M.D.N.C. 2016)

Available at https://www.gpo.gov/fdsys/pkg/USCOURTS-ncmd-1_02-cv-00373/pdf/USCOURTS-ncmd-1_02-cv-00373-7.pdf

Once again, the trial court in this long-running litigation has absolved fiduciaries of liability despite their failure to exercise procedural prudence in deciding to eliminate stock funds holding the shares of the former parent company and one of its subsidiaries, finding that their conduct did not cause the plan’s losses. In an earlier decision, the trial court also found no fiduciary liability based on an “objectively prudent standard,” reasoning that even though the fiduciaries’ decision making process was deficient, a hypothetical prudent fiduciary could have made the same decision (see our Checkpoint article). The Fourth Circuit then reversed, stating that a decision is objectively prudent only if, “more likely than not,” a hypothetical prudent fiduciary would have made the same decision. By substituting “could” for “would,” the trial court had applied a lower standard, allowing fiduciaries to avoid liability even if there were only a remote possibility that a prudent fiduciary would have reached the same decision (see our Checkpoint article).

On remand, the trial court applied the Fourth Circuit’s objectively prudent standard to the facts. First, the court discounted the fiduciaries’ failure to properly adopt an amendment eliminating the stock funds, reasoning that the failure would not have affected a prudent fiduciary’s substantive decision. Next, the court balanced the risk of continuing to offer two undiversified, non-related employer stock funds against the potential for high returns, finding that a prudent fiduciary’s market research at the time would have revealed that ongoing litigation posed a considerable risk to the stocks’ values that would have outweighed any reasonable upside potential. Finally, the court found that the six-month period (which became nine months) for eliminating the stock funds was reasonable (even though it was established without investigation or research), because it was long enough to give participants notice and to process the divestiture. Thus, the court concluded that under the objectively prudent standard, the fiduciaries had shown that a hypothetical prudent fiduciary, more likely than not, would have eliminated the two stock funds.

EBIA Comment: While these fiduciaries may have avoided liability despite their failure to follow a prudent process to determine whether and when to eliminate the stock funds, the outcome should not obscure the broader lesson of this case: Fiduciaries can avoid the practical difficulty of proving what a hypothetical prudent fiduciary would have done by ensuring that decisions are well-reasoned, meetings and decisions are appropriately documented, and the individuals making those decisions are authorized under the plan’s governance provisions. 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.J (“Special Issues: Mergers and Acquisitions—Fiduciary Duties During the Transaction”).

Contributing Editors: EBIA Staff.