Fiduciaries held to higher standard in proving plan loss was not caused by procedural imprudence

In determining whether fiduciaries who breached duties of procedural prudence in divesting a plan of company stock actually were liable for causing the resultant loss, courts must ascertain whether another fiduciary acting prudently would have made the same decision, the U.S. Court of Appeals in Richmond (CA-4) has held. Accordingly, a lower court erred in focusing on whether a prudent fiduciary could have made the same decision.

Procedural imprudence

Plan fiduciaries were determined to have breached their duties under ERISA by, following a corporate spin-off, liquidating company stock funds held in the plan on an arbitrary timeline without conducting a thorough investigation, resulting in a substantial loss to plan participants. The fiduciaries failed to engage a prudent decision making process and not only acted contrary to the express terms of the plan, but reflected no consideration of the purposes of the plan, which was to provide long-term retirement savings. Moreover, the record indicated that the divestment was driven by fear of liability more than the best interests of the plan participants.

The trial court, however, further determined that the fiduciaries met their burden of proof by establishing that the procedural breaches did not cause the loss allegedly sustained by the plan. According to the trial court, the decision by the fiduciaries to eliminate the company stock fund was “one which a reasonable and prudent fiduciary could have made” after a thorough investigation of the issues.

Initially, the appeals court affirmed the holding of the trial court that the plan fiduciaries did not engage any process by which they could investigate, analyze, or consider the circumstances regarding the company stock and whether it was appropriate to divest. The extent of the procedural imprudence appeared to the court to be “unprecedented” in an ERISA case.

Loss causation: burden of proof

The appellate court also agreed with the trial court that the fiduciaries bore the burden of establishing that their imprudent decision making process did not cause the plan’s loss. However, the court disagreed with the trial court on the standard to be used in determining whether the procedural imprudence of the fiduciaries actually caused the plan’s loss.

The Fourth Circuit initially explained that even if a fiduciary failed to act prudently, by not conducting an appropriate investigation before making a decision, it will be insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway. Thus, the court noted, if a hypothetical prudent fiduciary would have made the same divestment decision, the decision would be viewed as “objectively prudent” and the fiduciaries would not be subject to liability.

The trial court, however, concluded that the evidence did not compel a decision to maintain the company stock fund in the plan and that a prudent fiduciary could have inferred that the decision to sell was prudent. Rejecting the relaxed standard applied by the trial court, the appeals court stressed that it would “diminish ERISA’s enforcement provision to an empty shell” if a breaching fiduciary was allowed to escape liability by showing nothing more than the “mere possibility that a prudent fiduciary “could have” made the same decision.”

On remand, the trial court was instructed to review all relevant evidence, including the timing of the divestment, in re-determining whether the plan fiduciaries met their burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same divestment decision.

Source: Tatum v. RJR Pension Investment Committee (CA-4).

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