The United States Supreme Court has been busy lately as today, Monday June 29, 2015, marks the end of the 2014-2015 term. Although much has been written about the multiple high profile cases decided in the last week, the Court also published an extensive list today of cases they have agreed to hear next term and those they will not hear. On the NO list was an important ERISA fiduciary breach appeal from the 4th Circuit Court of Appeals called Tatum v. RJR Pension Committee. For those interested in reading the extensive briefs, the website SCOTUSblog is an excellent resource.
In a nutshell, this case was about what to do when a fiduciary has breached their duty of prudence by failing to put in place a prudent process to evaluate an investment decision. Can the defendant avoid liability by arguing that the result would be the same even if they had a prudent process in place (i.e. the ultimate decision was still substantively prudent)?
Here, it was the decision of whether to keep or eliminate Nabisco stock in the RJR 401k plan after the company split into two. The plaintiffs alleged that the defendants met for just about an hour and only considered their own liability in deciding to eliminate the stock. Ultimately, the stock price bounced back 200% and the participants in the plan missed out on these gains.
The 4th Circuit concluded that the defendants failed to have a prudent process because they failed to consider the best interests of the participants. The question then becomes, once you’ve shown a failure of procedural prudence, what can the fiduciary prove to show they still made the right substantive choice?
The defendants wanted a standard that would have allowed them to put on evidence that a prudent fiduciary COULD have made the same decision. The plaintiffs, and ultimately the 4th Circuit, supported a standard where the defendant must show that a prudent fiduciary WOULD have made the same decision. Hence, the Could Have vs. Would Have issue.
As explained simply to me by one of the attorneys representing the plaintiffs, Brendan Maher of Stris & Maher, the Could Have standard is essentially proving that if you surveyed 100 prudent fiduciaries, 1 of them would make the same decision. The Would Have standard would require proving that 51 of 100 would make the same decision. Simply, the Would Have standard gives the defendant no benefit of the doubt.
In declining to hear the case, the Supreme Court probably took into consideration a brief from the Solicitor General and the Department of Labor that argued the 4th Circuit got the decision right and that the Court shouldn’t hear it.
From a strict legal perspective, the opinion of the 4th Circuit is only valid for those courts that reside in that circuit. The Supreme Court’s denial to hear it does not make it the law for all other circuits. But the overall lesson is applicable to all fiduciaries.
If you fail to have a prudent process in place to make fiduciary decisions, you will have a very high bar to overcome to show you still made the right decision. Imagine a blind monkey throwing a dart at a wall with every mutual fund in the world on it. It’s possible that the monkey hits the “World’s Best Mutual Fund” assuming one exists. In this hypothetical, it’s easy to argue the monkey shouldn’t be held liable as the plan could not have invested in a better fund. But in reality, there are many “prudent” investments that can be made available in a plan. What if the monkey hit a fund that ranks in the top 20%? The top 40%? The top 60%? The answer becomes harder.
Simply put, fiduciaries should not be “shooting from the [monkey] hip” and trying to make good substantive choices without the time and effort needed to know whether the decision is good or bad. There is no good substitute for a good prudent process. Instead, there are only bad substitutes that involve expensive lawyers and expensive expert witnesses trying to prove you didn’t commit monkey business. Choosing the latter over the former is…bananas.