The U.S. Supreme Court might hear a case in which a defined contribution plan sponsor is being sued for selling a stock fund too soon — the opposite of what a typical fiduciary lawsuit alleges.
This reverse stock-drop case — RJR Pension Investment Committee et al. vs. Tatum et al. — will include some knotty legal questions if the court does review it. Key issues include DC plan executives' responsibility to follow and document investment decisions to meet the guidelines for fiduciary prudence contained in the Employee Retirement Investment Security Act.
The case could hinge on whether the Supreme Court decides to rule on a standard of fiduciary prudence distinguishing between the words “could” and “would.”
In the RJR case, a federal District Court issued a pro-RJR ruling, saying the plan needed to show that a hypothetical prudent fiduciary “could have” acted in a similar manner as RJR plan executives. This is a more flexible standard.
But an appeals court reversed the District Court, saying RJR had to show that a hypothetical prudent fiduciary “would have” acted in the same manner - a stricter standard.
ERISA attorneys say there's a big difference between the two standards. In December 2014, the RJR plan petitioned the Supreme Court. Last month, the Supreme Court asked the solicitor general to submit views on the case, a strong indication to ERISA attorneys that the court is interested in ruling on the case.
The RJR case is based on a 1999 decision by RJR Nabisco Holdings to split into a tobacco company (R.J. Reynolds) and a food company (Nabisco).
When the tobacco company was spun off in June, it had a separate 401(k) plan whose investment options included publicly traded shares of the tobacco company, the food company and the old parent company (whose primary asset was its stake in the food company).
The tobacco company 401(k) plan froze the latter two stock investments. Court documents show plan executives sold the two stocks at a substantial loss on Jan. 31, 2000. The food-company stock was down 40% from the spinoff and the parent company stock was off 60%.
However, the food-company stock rose, thanks to a bidding war in which Philip Morris Cos. Inc. was the victor in December 2000. Court documents show the parent company stock rose 247% and the food-company stock rose 82% from the day the tobacco 401(k) plan sold them.
In May 2002, participants in the tobacco company 401(k) plan filed a class-action suit against the plan, alleging a breach of fiduciary duty for imprudently selling its holdings in the food company and the old parent company.
A federal District Court judge in Greensboro, N.C., ruled in favor of the RJR plan in February 2013. Participants appealed. In August 2014, the 4th U.S. Circuit Court of Appeals, Richmond, Va., voted 2-1 to reverse the District Court ruling.
In their petition to the Supreme Court, RJR plan attorneys said the plan held “large amounts of Nabisco stock solely because of a historical accident.”
“Those holdings were not the result of ERISA's pro-diversification policies,” the attorneys wrote. RJR officials acted prudently to avoid being saddled with multiple single-stock investment options, the petition said.
The plan participants' petition to the Supreme Court said the actions by the RJR plan were punctuated with multiple failures to “investigate or monitor the reasonableness” of its decision, representing a breach of fiduciary duties. They said the court shouldn't overturn the appeals court's ruling.
Attorneys unaffiliated with the case don't expect the solicitor general's opinion for several months, meaning the Supreme Court is likely to wait until at least the fall to decide if it wants to take the case. The current court session ends June 30.