Fourth Circuit Ruling Increases Standard of Prudence for Fiduciaries

In Tatum v. RJR Pension Inv. Comm., No. 13-1360 (4th Cir. Aug. 4, 2014) the Fourth Circuit Court of Appeals ruled that the standard for the fiduciaries of the R.J. Reynolds (RJR) 401(k) plan should be whether a prudent fiduciary "would have" made the same decision, not, as the district court ruled, "could have." The case involved the elimination of two company stock funds as investment options in the company's 401(k) plan when RJR was spun off from Nabisco.

The district court had ruled that the suit failed because a prudent fiduciary "could have" made the decision to eliminate the company stock funds, even though the also court ruled that the committee had spent very little time on the decision and had failed to thoroughly investigate the alternatives and risks. Tatum appealed, and the Fourth Circuit remanded the ruling, saying the appropriate standard is whether a prudent fiduciary "would have" made the same decision. The Fourth Circuit ruled the "could have" standard was too lenient and that the "would have" standard has been widely applied by other courts in a number of fiduciary contexts. The "could have" standard would mean that a much broader range of choices could still be considered prudent.

The Chamber of Commerce and the American Benefits Council requested a full en banc rehearing of the case, saying the "would have" standard raised a new and much more difficult hurdle for fiduciaries. On September 3, the court denied the request.