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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Are You Amending Your 401(k) or Pension Plan? A Court Reminds Us to “Do It Right” or Else

Posted in U.S. Pensions & Benefits Law

A recent decision provided a wake up call for plan sponsors and plan committees: the court set aside a plan amendment in an ongoing challenge to the elimination of Nabisco stock as an investment choice in the RJR Tobacco plan. We have previously written about the importance of following plan procedures when implementing changes, but this new decision starkly lays out the risks of ignoring the ERISA requirements and suggests some best practices to follow when making plan amendments.

The RJR Case

The case arose after the spin-off of RJR Tobacco from Nabisco which resulted in the creation of an RJR plan for Tobacco employees and the elimination of Nabisco stock as an available investment under the RJR plan. Unlike the usual “stock drop” scenario in which plan fiduciaries are sued because they kept employer stock as a plan investment, in this case the participants claimed that the stock was eliminated as an investment option when the price was depressed, depriving them of profits they would have made when the stock rebounded. At issue was an amendment to the complaint challenging the validity of the “amendment” RJR said required liquidation of the Nabisco stock fund.

Amendment Fundamentals

The court began by reminding us that ERISA requires that every plan have a written amendment procedure specifying who is authorized to adopt amendments and how they are to be adopted. In this case, the specificity of the Plan’s amendment procedure proved fatal. It stated that the Employee Benefits Committee (EBC) had authority to amend the plan “by written instrument.” The Plan specified in another section that: “All resolutions or other actions taken by the EBC shall be by vote of a majority of the members of the Committee present at any meeting, or without a meeting by an instrument in writing signed by a majority of the members of the Committee.” The challenged amendment, which the Court invalidated, was called an amendment but was signed only by the secretary of the EBC. No formal EBC meeting had been held to discuss or vote on the elimination of the Nabisco stock fund.

What About Ratification?

Did RJR’s subsequent actions ratify the amendment? The Court rejected RJR’s argument that notices to participants and subsequent amendments ratified the challenged amendment, finding that in this case “ratification would have rendered the specific requirements meaningless.” The decision leaves open the question of whether ratification could be used to cure adoption failures for plans that have a less specific amendment procedure, but suggests that there may be cases where ratification could work. The Supreme Court’s recent decision in CIGNA v. Amara that plan communications can’t amend the terms of ERISA plans, which was the subject of a previous blog post, could, however, preclude arguments that communications ratified plan changes.

Some Best Practices

Setting aside this amendment could affect plaintiffs’ fiduciary breach claims, since the EBC members can no longer claim that the challenged amendment required selling the Nabisco stock when they did. However, this issue could arise in other contexts as well, such as in determining whether certain plan amendments were adopted by required deadlines. Some suggestions to avoid this exposure if you want to have clear and specific procedures are:

  • Make sure that everyone who needs to understands your plan amendment procedure. A provision that the “Company” may amend a plan should specify that amendment requires action by the Board of Directors.
  • If amendment authority has been delegated to a committee or specified officers, make sure that the plan text incorporates that delegation.
  • Keep clear minutes reflecting votes to approve plan amendments, including language reflecting any delegation to individuals to execute amendments (such as “The head of HR is hereby authorized to take any and all action necessary to implement this resolution, including, but not limited to, executing a plan amendment.”) 
  • If you intend that one Board or Committee member may be delegated the authority to act unilaterally, spell it out in the plan document.

This decision is an alert to check whether your Plan rules are drafted with enough flexibility to accommodate the Company’s corporate governance practices. Since there is no guarantee that a court will recognize ratification, and there may be circumstances where the Company will not want unauthorized action to be treated as ratified, the best protection is to strictly follow all plan rules.