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AARP Asks Court to Consider the Correct Causation Standard for a Fiduciary Breach

AARP’s brief argues that the court used the incorrect standard in determining whether an investment decision was prudent and urges the appeals court to adhere to the correct standard to determine whether fiduciaries have breached their duty of prudence.


Until June 15, 1999, R.J. Reynolds Tobacco (RJRT), R.J. Reynolds Tobacco Holding (RJRTH) and RJR Nabisco (Nabisco) were subsidiaries of RJR Nabisco Holdings Inc. (RJR). Employees in the companies participated in a 401(k) plan that allowed investment in Nabisco and RJR stock. In the wake of widespread tobacco litigation, Nabisco's board of directors decided to spin off RJRT as a distinct company to separate the tobacco business from Nabisco's food business. As part of the spinoff, which took place in June 1999, the 401(k) plan was split into two separate plans and the Nabisco and RJR stock held in RJRT's 401(k) plan was frozen and plan participants were prohibited from directing the investment of new contributions into the Nabisco stock.

During the freeze period, Nabisco stock dropped to its all-time low, and RJRT's plan sold all of its Nabisco stock at a substantial loss. Six months later, the stock rebounded and was selling for nearly three times more than what the stock sold for when the divestiture occurred.

In 2002, a RJR employee sued RJR and the plan's investment and administrative committees, alleging that they breached their fiduciary duties under ERISA by forcing participants to sell their Nabisco stock when such shares were selling at an all-time low.

While concluding that the process used by the decision makers fell short of what ERISA would require of a fiduciary and was made with “virtually no discussion or analysis,” “not on research or investigation” and “took place in approximately one hour,” the court also held that RJR had met its burden to show that a hypothetical prudent fiduciary could have made the same decision on the date in question. The court ruled that “Tatum and the class are therefore not entitled to recover from RJR based on their breach of fiduciary duty claim.”

The case is now before a federal appeals court, where AARP Foundation Litigation attorneys filed AARP’s brief. The brief argues that the lower court held the fiduciary to a very low standard, contrary to both ERISA and the common law of trusts on which ERISA is based. The brief argues that under that standard fiduciaries would only need to conduct a superficial review of investments in order to meet their duties — in direct contradiction to the enhanced responsibilities expected of those entrusted to invest the funds of others.

What’s at Stake

Holding fiduciaries to the standard articulated by the lower court will mean participants will find it almost impossible to challenge a fiduciary’s selection and monitoring of any investment in their retirement plans.

Case Status

Tatum v. R.J. Reynolds Tobacco is before the U.S. Court of Appeals for the Fourth Circuit.