The appellate court ruling in the R.J. Reynolds Tobacco Co. case is clear — companies that offer their own stock in their 401(k) plans do so at their own peril. They ought to proceed carefully, recognizing that the interest of the participant in the investment is paramount over other concerns.
Corporate executives, more than anyone else, should recognize the dynamic nature of a company's structure. There are frequent acquisitions and sales of corporate assets, involving entire business units and thousands of employees, sometimes disconnecting a company stock fund for some employees from the plan sponsor, as was the case with R.J. Reynolds and Nabisco. Corporate restructuring is fraught with complications for 401(k) plans.
In the RJR case, the company sold the stock in two Nabisco stock funds after it split the tobacco company from the food business. The depressed Nabisco stock rebounded after the breakup, and plan participants sued.
R.J. Reynolds Tobacco Holdings Inc. could be forced to pay out millions to participants for selling their holdings in the two funds at a loss after the tobacco company split from its food business in June 1999, before the rebound in the stock price. The participant suit alleges a breach of fiduciary duty for eliminating the two investment options.
In its case, the company representatives argued that officials were carrying out a directive of the plan in ending the two funds after the breakup. But the appellate court noted that amendments to the plan required trustees to freeze the two Nabisco funds temporarily through Jan. 31, 2000, but did not require trustees to eliminate them. After the freeze expired, the ruling noted, the investment committee was free to add options to the plan and could have reinstated the Nabisco funds as part of those options.
It would be unusual for a plan sponsor to offer an investment option consisting solely of another company's stock. But sponsors must consider such scenarios when deciding to offer company stock in the first place and in subsequent plan amendments. The $1.2 billion R.J. Reynolds retirement fund had $15.6 million in Nabisco holdings as of Dec. 31, 1999.
Richard "Brick" Susko, partner in a law firm that counsels plan sponsors, lamented in the Dec. 27 Pensions & Investments, "If you offer the employer stock fund and it goes down, you get sued. If you take it away and it goes up, you get sued. It's the worst form of second-guessing. …"
Would the participants have sued if the stock hadn't rebounded? Maybe not. But in its zeal to get rid of the Nabisco offerings in the plan, Reynolds executives forgot one of the reasons for offering a 401(k) plan in the first place: to place allocation decisions and attendant return and risk with participants. With the Nabisco stock, the company made the decision and now, based on the appellate court ruling, it could have to assume the risk.