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R.J. Reynolds must prove 401(k) plan changes didn't hurt participants: Court


A federal appeals court has ruled that R.J. Reynolds Tobacco Co. will have to present additional evidence to prove that its decision to liquidate two investment funds in its 401(k) retirement plan did not adversely impact plan participants.

The ruling, handed down Monday by a three-judge panel of the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, is the latest milestone in a class action against the Winston-Salem, North Carolina-based cigarette maker dating back more than a decade.

Richard Tatum, an R.J. Reynolds employee, filed suit against the company in 2002 on behalf of participants in its 401(k) plan for allegedly violating fiduciary responsibilities established under the Employee Retirement Income Security Act by improperly eliminating two company stock funds that were frozen following the operational division of R.J. Reynolds from Nabisco Inc. in 1999.

The two companies had merged in 1984 and had been previously organized under one company name, RJR Nabisco Inc., and shared a 401(k) retirement plan. That plan offered two company stock investment funds, one supported by Nabisco's food manufacturing operations exclusively and one supported by the combined food and cigarette operations.

Following the spinoff in 1999, a new 401(k) plan was created for the R.J. Reynolds division, under which the combined R.J. Reynolds/Nabisco company stock fund was subdivided into separate funds. The Nabisco-supported funds were then frozen, permitting participants to maintain their existing investments in the funds but preventing additional share purchases.

Despite a requirement in the plan's governance document that the Nabisco funds remain frozen, R.J. Reynolds hastily decided to eliminate them entirely from the plan in 2000, according to court documents.

After more than 10 years of legal proceedings in U.S. District Court in Greensboro, North Carolina, a federal judge ruled that R.J. Reynolds and its retirement plan administrative committees breached their duties as plan fiduciaries under ERISA by eliminating the Nabisco funds “without undertaking a proper investigation into the prudence of doing so.”

However, the District Court judge also ruled that the company had sufficiently proven at trial that the breach did not cause the alleged losses incurred by plan participants by establishing that a proper investigation wouldn't have necessarily precluded it from eliminating the Nabisco funds.

In its 2-1 ruling, the 4th Circuit panel upheld the lower court's ruling on R.J. Reynolds' breach of its fiduciary duty but overturned the court's ruling that the company had satisfied its burden of proof of whether its decision adversely affected the plan's participants, concluding that the District Court judge did not apply the correct legal standard for establishing liability.

“A plan fiduciary carries its burden by demonstrating that it would have reached the same decision had it undertaken a proper investigation,” Judge Diana Gribbon Motz wrote in the court's majority opinion. “(The District Court) required R.J. Reynolds to prove only that 'a hypothetical prudent fiduciary could have decided to eliminate the Nabisco Funds.'”

The 4th Circuit panel remanded the case back to the U.S. District Court in Greensboro for further proceedings.