WINSTON-SALEM, N.C. - When it comes to company stock in 401(k) plans, employers apparently are damned if they let participants sell their holdings, and damned if they don't.
First, the collapse of Enron Corp. highlighted the liabilities plan sponsors face for not letting participants sell their stock when the share price drops. Now, a recent class-action lawsuit pinpoints the risks employers face for failing to let workers hold on to depressed stock that later rebounds.
The lawsuit, Tatum vs. The R.J.R. Pension Investment Committee of the R.J. Reynolds Tobacco Co. Investment Plan, was filed by 401(k) participant Richard G. Tatum on May 23 in U.S. District Court in North Carolina. It alleges breach of fiduciary duty by R.J. Reynolds, Winston-Salem, for liquidating participants' holdings in stock in the Nabisco foods affiliate on Jan. 31, 2000, six months after the company split its tobacco and food operations in half.
Frozen holdings
Before the company's breakup in June 1999, participants could invest in stock of both Nabisco, the food manufacturer, as well as its parent corporation, Nabisco Group Holdings. The plan was amended on June 14, 1999, and participants' holdings in Nabisco and its parent company were frozen. Participants were told the Nabisco stock funds would be eliminated in about six months. According to the lawsuit, nothing in the amendment prevented the plan fiduciaries from continuing to hold the frozen Nabisco stock accounts.
Plaintiffs contend R.J. Reynolds Tobacco officials failed to act solely in the best interests of participants by "eliminating the Nabisco stock as investment alternatives under the plan, requiring complete divestment of all plan assets from all Nabisco stock ... and failing to exercise their discretion to include these funds as continuing investment options under the plan."
The plan fiduciaries "failed to consider the outlook for Nabisco stocks in January 2000; they simply barreled ahead and sold all Nabisco stock held by the plan based on a decision made months earlier," said Bill Lann Lee, partner in the Washington office of Leiff, Cabraser Heimann & Bernstein LLP, which represents the plaintiffs.
Tens of millions
Jeffrey Lewis, a lawyer at the Oakland, Calif.-based firm of Sigman, Lewis & Feinberg, which also represents the plaintiffs, said the losses suffered by the participants could run into the tens of millions of dollars. On Dec. 30, 1999, a month before the cigarette maker's sale of the Nabisco stock, the $1.2 billion retirement plan's Nabisco holdings were valued at $15.6 million, or 1.3% of total assets.
R.J. Reynolds Tobacco and its parent company, R.J. Reynolds Tobacco Holdings Inc., "believe this lawsuit is without merit and intend to defend it vigorously," according to a company statement. A company spokesman would not comment further.
The crux of the suit rests on an employer's dilemma: risking that the depressed stock of a former affiliate might slide further, causing even bigger losses to participants, or acknowledging the potential for participants to win big if the stock takes off.
The case hinges on "classic 20-20 hindsight," observed Sherwin S. Kaplan, of counsel to the Washington law firm of Thelen Reid & Priest LLP. Mr. Kaplan has no role in the suit. "A publicly traded stock, absent fraud, is worth what it is worth. Nobody knows what it is going to be valued at," said Mr. Kaplan, a former deputy associate solicitor in the Labor Department's plan benefits security division.
While the plaintiffs' lawyers in the R.J.R. case charge there is sufficient evidence to show that R.J. Reynolds officials anticipated Nabisco's stock price would rise dramatically after the breakup, attorneys generally representing employers say nothing in federal pension law requires plan sponsors to let participants bet on a single stock.
"Plan sponsors should administer the plans in a way to allow participants to save for their retirement, not allow participants to take a flyer on a single stock," said William A. Schmidt, partner in the Washington law firm of Kirkpatrick & Lockhart LLP. He is not connected to the suit.
Moreover, unless plan documents specify that R.J. Reynolds' plan had to hold Nabisco stock, the fiduciaries were under no obligation to let participants hold it, said C. Frederick Reish, partner in the Los Angeles firm of Reish, Luftman, McDaniel & Reicher PC and a well-known ERISA attorney.
Mr. Reish noted, however, that if R.J. Reynolds officials based their decision to sell participants' holdings of Nabisco stock from the plan after the company's breakup simply for corporate reasons without considering whether participants might benefit from continuing to hold it, "then the plan committee is in trouble."
Under scrutiny
Should the case go to trial, the process that R.J. Reynolds officials used to decide to sell the Nabisco stock would be under scrutiny, Mr. Reish and others noted.
The safest course for employers divesting businesses as part of a restructuring or acquiring a unit of another company is to freeze participants' investments in the spun-off or acquired business, but not necessarily force participants to sell their current holdings, said Rob Reiskytl, a consultant in the Minneapolis office of Hewitt Associates.
He said employers should give participants several months' notice about their plans and explain their reasoning for their actions.
R.J. Reynolds gave six months notice.
Seth Moskowitz, an R.J. Reynolds spokesman, noted the company did not advise workers to buy Nabisco stock, nor were workers required to own any company shares. Moreover, the company match - up to the first 6% of participants' contributions - is not made in company stock; instead, it tracks the employee's own investment choices in the same proportion.
Mr. Lewis also represents plaintiffs in a similar lawsuit against SBC Communications Inc., San Antonio, Texas, and anticipates that case will be settled outside court. In that case, participants filed a $1.15 billion class-action lawsuit charging that SBC sold off more than $600 million of employee holdings in AirTouch Communications Inc., whose stock had more than doubled before SBC took it over, and reinvested the proceeds in SBC stock, which remained flat. AirTouch is now known as Vodafone AirTouch.
Stronger claim
He said plaintiffs in the R.J. Reynolds case have a stronger claim because the amendment to the plan allowed fiduciaries to simply freeze participants' investments in the Nabisco stock without forcibly selling it The SBC plan amendment, by contrast, mandated the elimination of the AirTouch stock fund by a specified date.
Plan amendments are directives to administrators; as such, employers making changes in accordance with amendments are not subject to fiduciary duties. Because the R.J. Reynolds administrators went beyond the plan document and took it upon themselves to eliminate the Nabisco stock investments, their decision was subject to fiduciary duties inherent in federal pension law to act solely in the best interests of the participants, explained Teresa Renaker, an associate working with Mr. Lewis at Sigman, Lewis & Feinberg.
The suit against R.J. Reynolds contends that when the company separated its tobacco and food businesses on June 15, 1999, Nabisco Group Holdings (the parent corporation of the food business) shares traded at around $21 a share; and Nabisco Holdings Corp. shares around $42 a share.
On Jan. 31, 2000, when R.J. Reynolds Tobacco sold all participant holdings of the two stocks from its retirement plan, Nabisco Group Holdings traded around $8.50 a share and Nabisco Holdings at $30 a share, according to the lawsuit. By the end of June 2000, Nabisco Group Holdings stock had risen to $30 a share and Nabisco Holdings, to $55 a share. Philip Morris Cos. acquired Nabisco Holdings in December 2000 at $55 a share, the lawsuit notes. At the same time, R.J. Reynolds Tobacco reacquired all outstanding shares of Nabisco Group Holdings for $30 a share.
