DOL Files Brief in RJR Stock Drop Case

July 9, 2013 ( – Acting Secretary of Labor Seth D. Harris is asking an appellate court to reverse its ruling for a case that upheld an employer’s decision to drop stock investments from its 401(k) plan.

In an amicus brief filed with the 4th U.S. Circuit Court of Appeals, Harris asked that an earlier decision by the U.S. District Court for the Middle District of North Carolina be reversed (see “Court Rules in Favor of Employer Who Dropped Stock”). As stated in the brief, the case involves an ERISA-covered pension plan that suffered a loss as a result of “a fiduciary’s breach of duty of care in failing to conduct an adequate investigation prior to making a significant investment decision for the plan.”

Harris agreed that the district court correctly held that the fiduciaries bore the burden of proving their failure to conduct a prudent investigation when they decided to divest the pension plan of two of its funds did not cause a loss to the plan. However, he said the district court “erroneously concluded…that the fiduciaries met that burden as to loss-causation by showing that a hypothetical prudent fiduciary could have come to the same decision, and were not required to show that such a fiduciary would, more likely than not, have done so.”

Harris pointed out that under Section 409(a) of the Employee Retirement Income Security Act (ERISA), “a fiduciary is personally liable for losses resulting from a breach of its duties. ERISA does not, however, expressly state who bears the burden of proving that the breach caused the loss or the applicable standard for meeting this burden.”

"The district court correctly concluded that once plan participants or other ERISA plaintiffs have shown that plan fiduciaries breached their ERISA duties and that the plan suffered a related loss, those fiduciaries have the burden of proving that their breaches did not cause the loss to the plan," he wrote. "Trust law places on the fiduciary the burden of showing that the loss would have occurred notwithstanding the breach and, thus, the district court's approach is consistent with the intent and purpose of the high trust law-derived standard of care ERISA imposes on plan fiduciaries."

Harris claimed the district court used an incorrect standard for determining whether the breaching fiduciaries made such a showing. "It is not sufficient to show that a hypothetical prudent fiduciary could prudently have decided to eliminate the [funds]. This standard is inconsistent with the adoption by this court, as well as other circuits, of a hypothetical prudent fiduciary standard, under which the reviewing court must determine a preponderance of the evidence standard what a prudent fiduciary would have done under the circumstances. By concluding that [the defendant] met its burden by showing that a hypothetical prudent fiduciary could have made the same decision, the district court's decision set too low a bar for breaching fiduciaries and threatens to weaken ERISA's deterrent effect against such breaches of fiduciary duties," he wrote.

In March 2013, the 4th U.S. Circuit Court of Appeals decided that in the case of Tatum v. R.J. Reynolds Tobacco Co., the defendant had not 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. The court stated in its ruling that the fiduciary was insulated from liability if a hypothetical prudent fiduciary would've made the same decision regardless.

The full text of the amicus brief can be found here.