Court Rules In Favor of Employer Who Dropped Stock

March 25, 2013 ( – A federal court found an employer’s decision to drop stock investments from its 401(k) plan was “objectively prudent.”

The U.S. District Court for the Middle District of North Carolina found R.J. Reynolds Tobacco Company (RJR) breached its fiduciary duties of procedural prudence when it decided to remove and sell Nabisco stock from its plan without a proper investigation into the prudence of doing so; however, the court determined that the decision to remove the stock under the circumstances is one that a reasonable and prudent fiduciary could have made after performing a proper investigation.  

According to the court opinion, the group in charge of deciding what to do about the stock had no authority or responsibility under the plan to implement any decision regarding the plan. Approximately 30 to 60 minutes were spent discussing what to do with the Nabisco shares following RJR and Nabisco’s split. They assumed the plan would not want a single, nonemployer stock fund in the plan and that having such a fund would not fit into the Employee Retirement Income Security Act (ERISA) diversification requirements.  

However, the court said the 4th U.S. Circuit Court of Appeals has found that while certain conduct may be a breach of fiduciary duty, the fiduciary can only be held liable if the breach actually caused a loss to the plan. In addition, the 4th Circuit adopted rulings of other courts that even if a fiduciary failed to conduct an investigation prior to making a decision, he is insulated from liability if “a hypothetical prudent fiduciary would have made the same decision anyway.”  

According to the opinion, the Nabisco stock steadily declined in value from the date of the firm’s spin-off from RJR to the date of divestiture from the stock in the RJR plan. In addition, an expert testified that a single stock is approximately four times as risky as a diversified portfolio of mutual funds. Nabisco was also still tied to ongoing tobacco litigation from when it was a part of RJR.  

The case was filed because shortly after the divestiture of the stock, its value began to rise.   

The opinion in Tatum v. R.J. Reynolds Tobacco Co. is here.