Benefits and Compensation

‘Could’ Versus ‘Would’ Is Important Difference in Fiduciary Acts, 4th Circuit Says in Tatum

An appeals court decision coming on the heels of a recent Supreme Court stripping the presumption of prudence for fiduciaries may raise the stakes even higher for plan sponsors. A panel of judges in the 4th U.S. Circuit Court of Appeals required that fiduciaries make a decision about company stock in their retirement plan based upon what they believe more prudent fiduciaries would have done — not what they could have done.

The ruling, in Tatum v. RJR Pension Investment Committee, 13-1360 (4th Cir., Aug. 4, 2014), makes it more important than ever for plan fiduciaries — especially for plans operating in the 4th Circuit, which has jurisdiction over Maryland, West Virginia, Virginia and North and South Carolina — to show adherence to plan documents and carefully review and note decisions about managing plan assets.


In 1999, R.J. Reynolds Tobacco Co. was spun off from Nabisco to separate the company’s food and tobacco businesses. After the spinoff, the RJR Nabisco Common Stock Fund was divided into two funds holding the food-business stock and tobacco-business stock separately. The two company stock funds holding only Nabisco stock are at the center of years of litigation that led to the recent Tatum ruling.

Shortly before the 1999 spinoff, a working group of corporate employees decided to sell off the Nabisco funds because they concluded that a stock fund holding only Nabisco stock posed a significant risk to the plan and promised high administrative costs. The fiduciary committees never discussed or voted on whether to divest the Nabisco funds, the court ruling says, and no outside counsel or independent analysts were engaged to consider the prudence of the decision.

Soon after the selloff of the Nabisco funds, the market price for the shares was well below their value ahead of the corporate spinoff. But by 2001, the shares were much above their value at the time of divestment by the company.

Plaintiff Richard G. Tatum in 2002 filed a class action suit against the RJR plan investment committee, alleging it breached ERISA fiduciary duties by arbitrarily eliminating the Nabisco funds from employee retirement plan options despite the likelihood that the shares would rebound after the corporate spinoff. In effect, the Tatum suit represents a “reverse stock-drop” case, opposite to the usual driver behind participant-plaintiff suits about company stock such as Dudenhoeffer v. Fifth Third, recently heard by the U.S. Supreme Court, because of the decision to remove, rather than keep a company stock fund from a retirement plan.

When heard by the U.S. District Court for the Middle District of North Carolina, those judges held in 2013 that RJR plan fiduciaries had breached their fiduciary duty with the liquidation of Nabisco stock without properly investigating the prudence of the action. However, the breach didn’t cause losses because the decision was one that a reasonable and prudent fiduciary could have made after conducting such an investigation. In other words, there was a breach, but no harm was caused by it.

Could vs. Would

However, on appeal, the 4th Circuit judges agreed on the breach but reversed the district court ruling about the harm caused. They found that the correct standard was not whether a reasonable and prudent fiduciary could have made the same decision, but whether a reasonable and prudent fiduciary would have made the same decision, according to a client bulletin about the case by attorney Deborah Boiarsky with Porter Wright Morris & Arthur on Aug. 11.

“At its worst, the decision in Tatum, … is significant because it has the potential to push plan sponsors and fiduciaries toward a Catch-22 position when it comes to taking action on retaining or eliminating company stock funds,” she wrote.

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