Would’ve, Could’ve, … Applying the Fiduciary Duty of Prudence

Last Updated: July 16, 2015

Fiduciaries to qualified retirement plans must follow four basic standards of conduct established by ERISA 404(a)(1). These are:
  1. The duty of loyalty,
  2. The duty of prudence,
  3. The duty to diversify, and
  4. The duty to adhere to plan documents.
Recently, the U.S. Supreme Court declined to hear an appeal from a 4th Circuit Court of Appeals decision interpreting the second fiduciary duty, the duty of prudence. In Tatum v. RJR Pension Investment Committee[1], the RJR Pension Investment Committee was being sued by plan participants for imprudently liquidating their stock in the recently spun-off Nabisco Company. After liquidating the stock, a bidding war to acquire Nabisco resulted in the Nabisco stock appreciating in value by nearly 250% over the following year. The participants alleged that the process by which the Committee decided to liquidate the stock was imprudent. Testimony from members of the Committee showed that the committee came to the decision to liquidate the stock after approximately an hour of discussion, and that their liquidation discussion focused on the Committee’s belief that holding an individual stock fund was possibly illegal, that it was highly risky, and that it would add cost and complication to the administration of the plan. The Committee did not undertake any action to investigate these beliefs. The District Court agreed that the Committee had breached its duty of prudence by liquidating the Nabisco stock without undertaking a proper investigation. However, the District Court determined that the Committee’s breach of their duty of prudence did not cause the losses to the plan because the decision to liquidate the stock was “one which a reasonable and prudent fiduciary COULD have made after performing such an investigation.” According to the District Court, the question was whether it was possible that the same decision WOULD have been made if a prudent process had been followed. The Participants appealed to the 4th Circuit Court of Appeals, and the 4th Circuit overturned the District Court’s interpretation of the duty of prudence. The 4th Circuit explained that the test was not whether a prudent fiduciary COULD have made the same decision; it was whether a prudent fiduciary WOULD have made the same decision. In other words, had a prudent process been followed, is it probable, or more likely than not, that the same decision would have been made? The U.S. Supreme Court declined to hear the appeal in this case; therefore, the 4th Circuit’s decision stands in favor of the participants.  The case was remanded to the District Court to determine damages. Although the holding in this case only governs the 4th Circuit, it is an important holding when plan fiduciaries are considering their duty of prudence. First, courts in other circuits around the country could consider the 4th Circuit’s holding persuasive, and adopt a similar rule for their circuit. Second, this case emphasizes the importance of ensuring that the process by which fiduciary decisions are made is prudent, and the need to thoroughly document that process. No one expects plan fiduciaries to be clairvoyant, but they need to be consistently asking themselves, “How would a prudent fiduciary approach this decision?” For more information about your duties as a fiduciary, or to discuss ways to help ensure that you have the process and documentation in place to show the prudence of your fiduciary decisions, contact our ERISA Services Team team today.
[1] Tatum v. RJR Pension Inv. Committee, 761 F. 3d 346 (4th Cir. 2014)
  PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


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