REVISED - September 14, 2000

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 98-20867

_____________________

ROBERT A BUSSIAN; JAMES J KEATING

Plaintiffs - Appellants

v.

RJR NABISCO INCORPORATED

Defendant - Appellee

_________________________________________________________________

Appeal from the United States District Court

for the Southern District of Texas

_________________________________________________________________

August 14, 2000

Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M.

GARZA, Circuit Judges.

KING, Chief Judge:

Plaintiffs-Appellants Robert A. Bussian and James J. Keating

appeal from the district court’s grant of summary judgment to

Defendant-Appellee RJR Nabisco, Inc. and its denial of class

certification. We reverse in part, vacate in part, and remand

for further consideration by the district court.

I. FACTUAL AND PROCEDURAL BACKGROUND
2

This case is yet another litigating who must bear the cost

of the collapse of Executive Life Insurance Company of California

(“Executive Life”) in the late 1980s and early 1990s. The issue

before us is whether Defendant-Appellee RJR Nabisco, Inc. (“RJR”)

acted consistently with its fiduciary obligations under § 1104 of

the Employee Retirement Income Security Act of 1974, 29 U.S.C.

§ 1001 et seq. (1994) (“ERISA”), when it chose to purchase a

single-premium annuity from Executive Life in August, 1987. 

Because this case comes to us from a grant of RJR’s motion

for summary judgment, our presentation of the facts reflects in

part the requirement that we view the evidence in the light most

favorable to Plaintiffs-Appellants Robert A. Bussian and James J.

Keating (“Appellants”). Many of the underlying facts are

uncontested. RJR’s involvement in this case comes about through

its purchase, in 1976, of Aminoil USA, Inc. (“Aminoil”), a

Houston-based oil company. Aminoil administered a pension plan

for its employees that was governed by ERISA. RJR sold Aminoil

in 1984, and the purchaser assumed the pension obligations for

all then-current employees. At the time of the sale, other

employees had ceased employment with the oil company and were

either already receiving pension benefits or were vested in the

Aminoil pension plan but were not yet eligible to receive

benefits. RJR retained the obligation of administering pension
1 Prior to April 22, 1987, RJR’s Retirement Board was

responsible for the Plan’s administration; subsequent to that

date, that responsibility fell to RJR’s Employee Benefits

Committee. 

2 RJR’s decision to terminate was consistent with the

provisions of the Plan and with ERISA. The Plan allowed RJR to

terminate it by purchasing an annuity from an insurance company

to provide benefits under the Plan. Upon doing so, the Plan

provided that RJR could recover any residual assets.

3

benefits for these former employees, including Appellants, under

an ERISA-defined benefit pension plan (“the Plan”).1

On October 16, 1986, RJR’s Board of Directors approved

resolutions authorizing the termination of the Plan and several

other plans of former RJR subsidiaries. The Board also approved

the purchase of an annuity to cover all pension obligations to

the participants and beneficiaries of all the plans. The Plan’s

documents provided that upon termination any excess funds would

revert to RJR.2 At the time the decision to terminate was made,

the Plan was over-funded, and the Board was informed that a

reversion could be expected. By December 1986, RJR was assuming

that an annuity would cost about $62.5 million, and allowing for

a $10 million cushion, was anticipating a reversion of about $55

million. 

Members of RJR’s Pension Asset Management Department were

given the responsibility of selecting an annuity provider. Paul

Tyner was involved from the beginning; Robert Shultz, hired in

March, 1987 as RJR’s Vice President of Pension Asset Management,

had responsibility for making the final decision. In October,
3 Overgard also did not send initial letters to three

companies Tyner suggested be added to the list because those

companies indicated they did not want to participate.

4

1986, RJR hired Buck Consultants, Inc. (“Buck”) to assist in the

endeavor. William Overgard, an investment consultant with Buck

Pension Funds Services, was asked to participate in the process

in January, 1987. 

Overgard was told that his role in the transaction was to

identify insurance companies and to provide those companies with

appropriate information in order to solicit the best bid from

each one that was interested in the business so that RJR could

select the carrier that was appropriate to its needs. Overgard

compiled an initial list of insurance companies that could

provide the annuity. That list included providers with which

Buck was familiar, that had a reputation for providing good

service to their clients, and that would have the capacity for a

placement covering approximately 10,000 individuals. In January,

1987, a letter was sent to thirteen companies inviting comments

on several issues related to the purchase of the annuity. In the

letter, RJR was not identified as the buyer of that annuity. 

Executive Life was not among those receiving the January

letter.3 This was because it was involved in a nontraditional

investment strategy: its portfolio had a higher percentage of

low-quality bonds and a lower percentage of other investments

than other insurance companies. Low-quality bonds, which are
5

also referred to as “high-yield” or “junk” bonds, are rated below

investment grade, i.e., ratings agencies have determined that the

issuing entity is a greater than average credit risk. In order

to compensate for the increased risk of default, such bonds must

offer a higher interest rate. See, e.g., Levan v. Capital

Cities/ABC, Inc., 190 F.3d 1230, 1235 (11th Cir. 1999). After

Overgard discussed Executive Life’s strategy with one of his

colleagues, the two decided that the company should not be

included on the initial list.

Overgard understood that by 1987, over 50% of Executive

Life’s portfolio was in low-quality bonds. In this Executive

Life was indeed unusual compared to its competitors in the

insurance industry. Information in the record suggests that the

average percentage of low-quality bond holdings was on the order

of 6% to 7%. Executive Life allegedly held the largest original

issue low-quality bond portfolio ever assembled, with most of its

acquisitions coming through Drexel Burnham Lambert (“Drexel”). 

Overgard understood Executive Life’s low-quality bond holdings to

be broadly diversified.

Based on his experience with Executive Life in the course of

bidding he conducted for guaranteed investment contracts, and his

desire to increase the competitiveness of the final bidding for

the annuity contract, on or about April 3, 1987, Tyner requested

that Executive Life be added to the list of carriers. In Tyner’s

opinion, Executive Life’s inclusion would facilitate bringing
6

other bidders down in price because it would come in with a lower

quote. According to William J. Wolliver, a former Manager of

Annuity Pricing for Prudential Insurance Company, Executive

Life’s low-quality bond portfolio enabled the company to underbid

his firm. At the time he requested that Executive Life be added,

Tyner did not think that the provider would be seriously

considered in the final bidding process. Instead, he believed

that RJR would go with a more well-known company.

To check up on Executive Life’s solvency and financial

health, Overgard reviewed the reports and ratings of four rating

agencies (Standard & Poor’s Corp. (“S&P”), Moody’s Investor’s

Services (“Moody’s”), A.M. Best (“Best”), Conning & Company

(“Conning”)). He reviewed the pros and cons of including

Executive Life on the list of carriers to be contacted with Henry

Anderson, an actuarial expert with Buck who, as the account

executive, had brought Overgard in on the RJR purchase. They

discussed the high-quality ratings that Executive Life had

received, the company’s interest in doing business, its

reputation for providing good service and for being knowledgeable

in the business, and its nontraditional investment portfolio. 

Overgard believed that a broadly diversified portfolio of lowquality bonds was a viable investment strategy. Based on his

investigation, Overgard determined that Executive Life should be

included on the bid list because the ratings the company received

from S&P, Best, and Conning were high; its low-quality bond
4 At some point after May, Mutual Life of New York dropped

out of the bidding. 

7

portfolio was broadly diversified and its investment strategy

sound; and its administrative capabilities and reputation in the

annuity business were strong. 

On April 8, 1987, Buck solicited bids from fourteen

potential annuity providers, including Executive Life. Buck had

previously explained to RJR that companies would make initial

bids and that Buck would select possibly three companies from

which final bids would be solicited. In May, five potential

providers submitted preliminary bids: AIG Life Insurance Company

(“AIG”), Aetna Life Insurance (“Aetna”), Executive Life, Mutual

Life Insurance Company of New York, and Prudential Asset

Management Company (“Prudential”).4 The other companies declined

to participate, primarily because of the complexity associated

with the numerous plans.

Between May and August, Overgard provided additional

information to the companies interested in bidding. The bulk of

his time was spent working with the companies to make sure they

had correct data and enough data to enable them to submit a

qualified bid, testing whether alternative strategies might be

available for placing the bid on the final bid day, and assessing

how hard he could push the companies in final negotiations. 

Sometime prior to August, 1987, Overgard learned that

Moody’s had given Executive Life a rating of A3, which was two 
5 The top ten Moody’s ratings are: Aaa, Aa1, Aa2, Aa3, A1,

A2, A3, Baa1, Baa2, and Baa3. The top ten S&P’s ratings are AAA,

AA+, AA, AA-, A+, A, A-, BBB+, BBB, and BBB-.

8

grades below that of S&P’s AAA rating for the company.5 He also

read media reports speculating that problems in the market for

low-quality bonds might affect Executive Life. Overgard

determined from a discussion with an individual at Moody’s that

the rating agency had not talked with Executive Life management

prior to issuing its rating, and he pursued “industry

intelligence” regarding the company. Overgard concluded that the

lower Moody’s rating was an attempt on the part of the agency to

gain publicity, but did not recall a specific discussion with the

individual at Moody’s regarding why the agency rated Executive

Life as it did, or how the agency viewed the provider’s

nontraditional portfolio. He found that the opinions of other

insurance companies were mixed: “some were not concerned about

Executive Life and some were willing to put the fear of God into

us,” the latter describing low-quality bonds as a bad investment

strategy. Concerned about what would happen to the market for

low-quality bonds should Drexel collapse, Overgard talked to

investment bankers. In Overgard’s opinion, those bankers were

quite eager to move into the market for low-quality bonds. 

Overgard also viewed Executive Life as working the case harder

and asking more questions during the bid solicitation process
9

than the other companies. Overgard concluded that Executive Life

should remain on the bid list.

Final bid day was set for August 12, 1987. On that day,

Overgard met with representatives of RJR (Tyner, and

representatives from RJR’s Employee Benefits and Legal

Departments) to review the preliminary bids. The sole

documentation RJR had comparing providers was a listing of the

final companies’ ratings and their initial bids. Buck did not

recommend any particular company; instead, it saw each of the

four remaining companies as qualified and competent to provide

the annuity. As a result, Overgard saw his role on final bid day

as obtaining from each company its best (lowest) bid. Overgard

negotiated with the four companies in one room; RJR

representatives were in another room. Overgard determined midday

that Aetna and AIG had given their best bid, and so concentrated

for the remaining period on obtaining lower bids from Prudential

and Executive Life. The following provides the final bids along

with other information Buck supplied RJR:

INSURER S&P BEST MOODY’S CONNING BID

Aetna AAA A+ AAA 102/104 $61.9 M

AIG AAA A AAA N/A $60.2 M

Executive Life AAA A+ A3 100/106 $54 M

Prudential AAA A+ AAA 98/91 $56.7 M
10

Aetna’s bid was the highest at $61.9 million, and Executive

Life’s was the lowest at $54 million. According to Overgard, the

numeric Conning ratings reflected historical information on

liquidity over two years. Thus, Aetna’s rating of 102/104

reflected an improvement, while Prudential’s ratings reflected a

decline. 

RJR had established three requirements that “at a minimum”

the company providing the annuity would have to meet: 

(1) receipt of an AAA rating from S&P; (2) capacity to administer

the plans; and (3) approval from Buck. On the final bid day,

Shultz had a number of other things to do. Because he had full

confidence in the RJR representatives present, and “because the

dollar value of the assets involved in the transaction was

insubstantial in comparison to RJR’s total pension portfolio,” he

attended the meeting for about an hour and fifteen minutes at its

outset. After the final bids came in, RJR representatives

present identified Executive Life as the insurer from which to

purchase the annuity, as it was the lowest bidder, had at least

one AAA rating, and was capable of administering the annuity. 

Tyner telephoned Shultz to inform him of the recommendation. 

After a fifteen- or twenty-minute conversation, Shultz gave the

go-ahead to select Executive Life. 

Unlike Tyner, Shultz was aware of a number of facts

regarding Executive Life, its chairman, Fred Carr, and the market

for low-quality bonds. For example, Shultz was aware (1) of the
6 Neither Shultz nor Tyner was aware that regulators in

California were looking into $188 million of Executive Life’s

reinsurance.

11

percentage of Executive Life’s portfolio that was devoted to lowquality bonds, (2) of allegations regarding a connection between

Executive Life and Drexel’s Michael Milken, (3) that Executive

Life was one of Milken’s largest customers, (4) that Drexel and

Milken were the targets of SEC and Attorney General

investigations of the 1986 insider trading scandal, (5) that

Executive Life and Carr came within the scope of those

investigations, and (6) that Executive Life of New York, a

subsidiary of Executive Life, had been fined by New York

insurance regulators due to the insurer’s reinsurance practices,

had $150 million of reinsurance disallowed, and had received from

Executive Life $150 million to make up the difference.6 Shultz

had not seen as much negative press regarding Aetna’s or

Prudential’s holdings of low-quality bonds as he had seen with

regard to the holdings of Executive Life, and he had not seen the

diversity of reviews of the other companies that he had seen with

respect to Executive Life. Shultz stated that he relied

primarily on Tyner’s input, and that his decision to concur in

the purchase of Executive Life’s annuity was made taking into

account the fact that “Executive Life had the same S&P rating as

did Prudential, had a reputation equal to or better than
7 The Pension Benefit Guarantee Corporation (“PBGC”) later

audited the termination of the Plan, and on February 7, 1989,

found it to be “in accordance with the plan provisions and in

compliance with the appropriate laws and regulations administered

by the Pension Benefit Guarantee Corporation.” The PBGC was

established to administer and enforce Title IV of ERISA. See

Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633, 637

(1990). “Title IV includes a mandatory Government insurance

program that protects the pension benefits of over 30 million

private-sector American workers who participate in plans covered

by the Title. In enacting Title IV, Congress sought to ensure

that employees and their beneficiaries would not be completely

‘deprived of anticipated retirement benefits by the termination

of pension plans before sufficient funds have been accumulated in

the plans.’” Id. (footnote omitted) (quoting Pension Benefit

Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 720 (1984)). A

statement that a termination is in accordance with the laws and

regulations administered by the PBGC is not a statement that the

PBGC considers the termination to be in accordance with fiduciary

standards set forth in Title I of ERISA. Cf. Waller v. Blue

Cross, 32 F.3d 1337, 1343-44 (9th Cir. 1994) (holding that plan

terminations must be consistent with both Title IV and Title I of

ERISA and noting that the two Titles protect pension benefits in

different ways). 

12

Prudential’s for being able to service complex annuity contracts

and was recommended by Buck.”

On August 17, 1987, RJR caused $54 million to be wired to

Executive Life. A letter agreement was signed November 23 of the

same year. RJR formally terminated the Plan on June 30, 1988.7 

The total pre-tax reversion associated with the termination of

all plans covered under the annuity was $82,080,000; this

resulted in RJR receiving on May 27, 1989 a net reversion of

$43,051,510. 

Tyner was aware that by 1989, Executive Life was suffering

financially. To his knowledge, however, no one at RJR considered

extracting himself from the deal to buy Executive Life’s annuity. 
13

RJR accepted the provider’s annuity contract on December 13,

1989. 

By late 1989, the low-quality bond market was suffering

significant losses. Because well over half of Executive Life’s

portfolio consisted of low-quality bonds, it felt the brunt of

those losses. In January, 1990, First Executive Corporation, the

parent of Executive Life, announced that its low-quality bond

portfolio had lost $1 billion in market value and that it would

take a $515 million writedown. In April, 1991, California

insurance regulators placed Executive Life in conservatorship,

and for a period of time, certain Executive Life policyholders

received reduced benefits. Eventually, the market for lowquality bonds rebounded, and Executive Life was taken over by a

consortium of French companies, which formed Aurora National Life

Assurance Company. Unfortunately, Appellants and some other Plan

participants have not received their full benefits.

Appellants filed suit, on their own behalf and on behalf of

a class, against RJR in Texas state court in 1991, alleging

violations of RJR’s fiduciary duties. RJR removed the case to

federal court and moved for summary judgment in 1992. In 1998,

the district court granted summary judgment and, consequently,

denied Appellants’ motion to certify a class. See Bussian v. RJR

Nabisco, Inc., 21 F. Supp.2d 680 (S.D. Tex. 1998). Appellants

timely appeal.
14

II. SUMMARY JUDGMENT

A. Standard of Review

We review the granting of summary judgment de novo, applying

the same criteria used by the district court in the first

instance. See Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th

Cir. 1994); Conkling v. Turner, 18 F.3d 1285, 1295 (5th Cir.

1994). Summary judgment is proper “if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law.” FED. R. CIV. P.

56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). 

“[T]here is no issue for trial unless there is sufficient

evidence favoring the nonmoving party for a jury to return a

verdict for that party. If the evidence is merely colorable, or

is not significantly probative, summary judgment may be granted.” 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)

(citations omitted). We must view all evidence in the light most

favorable to the party opposing the motion and draw all

reasonable inferences in that party’s favor. See id. at 255. 

B. The Standard
8 RJR does not argue that activities conducted in

implementing a plan termination, such as the selection of an

annuity provider, fall outside the standard set forth in

§ 1104(a). Cf. Waller, 32 F.3d at 1343-44 (“We find ERISA’s

failure to exempt purchasing annuities from § [1104]’s fiduciary

obligations to be a powerful indicator of Congress’ intent not to

exempt the process for choosing annuity providers — possibly the

most important decision in the life of the plan — from fiduciary

scrutiny.”).

15

Section 1104(a) sets forth the general duties imposed upon

ERISA fiduciaries:8 

(1) Subject to sections 1103(c) and (d), 1342, and 1344

of this title, a fiduciary shall discharge his duties

with respect to a plan solely in the interest of the

participants and beneficiaries and — 

(A) for the exclusive purpose of:

(i) providing benefits to participants and their

beneficiaries; and

(ii) defraying reasonable expenses of administering the

plan;

(B) with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting

in a like capacity and familiar with such matters would

use in the conduct of an enterprise of a like character

and with like aims;

(C) by diversifying the investments of the plan so as to

minimize the risk of large losses, unless under the

circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments

governing the plan insofar as such documents and

instruments are consistent with the provisions of this

subchapter and subchapter III of this chapter.

29 U.S.C. § 1104(a)(1). We have recognized that this provision

imposes several overlapping duties. See, e.g., Metzler v.

Graham, 112 F.3d 207, 209 (5th Cir. 1997) (involving the duty to

diversify and the duty of loyalty); Donovan v. Cunningham, 716

F.2d 1455, 1464 (5th Cir. 1983) (“Section [1104] imposes upon

fiduciaries a duty of loyalty and a duty of care.”). Appellants
16

assert that the district court erred in holding that, as a matter

of law, RJR satisfied its obligations under ERISA. They argue

that RJR was required to attempt to select the safest available

annuity to satisfy its duty of loyalty. They also contend that

RJR failed to conduct an investigation that satisfied its duty of

care, and that it acted inconsistently with its duty to diversify

in selecting an insurance carrier that held 50% to 60% of its

portfolio in low-quality bonds. 

1. The Duty to Diversify

We first narrow the focus of our inquiry by disposing of one

of Appellants’ arguments. They assert that § 1104(a)(1)(C)

imposes on a fiduciary selecting an annuity the duty to select an

insurance provider whose portfolio is sufficiently diversified. 

We disagree. Section 1104(a)(1)(C) deals specifically with

“investments of the plan.” As RJR points out, the purchase of an

annuity to facilitate plan termination is not an investment of

the plan. It is, as 29 U.S.C. § 1341(b)(3) provides, a “final

distribution of assets.” Section 1104(a)(1)(C) therefore does

not impose upon a plan fiduciary the obligation to investigate or

ensure the adequate diversification of an annuity provider’s

portfolio. This is not to say that a plan fiduciary has no

obligation to consider the diversification of an annuity

provider’s portfolio; such an obligation may exist under
17

§ 1104(a)(1)(B), a possibility we address infra. Cf. 29 U.S.C.

§ 1104(a)(2) (stating that the “diversification requirement of

paragraph (1)(C) and the prudence requirement (only to the extent

that it requires diversification) of paragraph (1)(B)” do not

apply to certain transactions). We are therefore left to

determine the proper standard to guide our inquiry into whether

summary judgment is appropriate to dispose of Appellants’ claims

that RJR breached its duties of loyalty and care in purchasing

Executive Life’s annuity. 

2. The Duty of Loyalty 

ERISA’s duty of loyalty is “the highest known to the law.”

Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir.), cert.

denied, 459 U.S. 1069 (1982); cf. Meinhard v. Salmon, 164 N.E.

545, 546 (1928) (Cardozo, J.) (“Many forms of conduct permissible

in a workaday world for those acting at arm’s length, are

forbidden to those bound by fiduciary ties. A trustee is held to

something stricter than the morals of the market place. Not

honesty alone, but the punctilio of an honor the most sensitive,

is then the standard of behavior.”). The Supreme Court recently

had occasion to describe ERISA’s duty of loyalty, in so doing

again recognizing the duty’s source in the common law of trusts. 

See Pegram v. Herdrich, — S. Ct. — , 2000 WL 743301, at *7 (U.S.

June 12, 2000) (“‘The most fundamental duty owed by the trustee
18

to the beneficiaries of the trust is the duty of loyalty. . . . 

It is the duty of a trustee to administer the trust solely in the

interest of the beneficiaries.’” (quoting 2A A. SCOTT & W. FRATCHER,

TRUSTS § 170, at 311 (4th ed. 1987))). 

Although ERISA’s duties gain definition from the law of

trusts, the usefulness of trust law to decide cases brought under

ERISA is constrained by the statute’s provisions. See Varity

Corp. v. Howe, 516 U.S. 489, 497 (1996) (“We also recognize . . .

that trust law does not tell the entire story.”); Cunningham, 716

F.2d at 1464. Under ERISA, for example, a fiduciary may have

financial interests adverse to beneficiaries, but under trust law

a “trustee ‘is not permitted to place himself in a position where

it would be for his own benefit to violate his duty to the

beneficiaries.’” See Pegram, 2000 WL 743301, at *8 (quoting 2A

SCOTT & FRATCHER, § 170, at 311)). Despite the ability of an ERISA

fiduciary to wear two hats, “ERISA does require . . . that the

fiduciary with two hats wear only one at a time, and wear the

fiduciary hat when making fiduciary decisions.” Id. (citing

Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 443-44 (1999));

see also Varity, 516 U.S. at 497. 

That ERISA contemplates that a plan fiduciary may have

multiple roles is reflected in the language of § 1104(a). That

section begins with the phrase “[s]ubject to sections 1103(c) and

(d), 1342, and 1344 of this title,” which explicitly refers to

ERISA provisions that allow plan assets to be returned to the
19

employer under some circumstances. See Borst v. Chevron Corp.,

36 F.3d 1308, 1320 (5th Cir. 1994), cert. denied, 514 U.S. 1066

(1995); District 65, U.A.W. v. Harper & Row, Publishers, Inc.,

576 F. Supp. 1468, 1477-78 (S.D.N.Y. 1983); Daniel Fischel & J.H.

Langbein, ERISA’s Fundamental Contradiction: The Exclusive

Benefit Rule, 55 U. CHI. L. REV. 1105, 1154 (1988). As a result,

although the balance of § 1104(a)(1) would appear to make a

return of assets to an employer a violation of the duty to act

“solely in the interest of participants and beneficiaries and for

the exclusive purpose of providing benefits to participants,”

§ 1104(a)(1)(A)(i), the provision’s initial phrase precludes such

an interpretation. 

Under ERISA, neither the decision to terminate an overfunded

plan, nor a reversion of plan assets that is consistent with

§ 1344(d), is a per se violation of § 1104(a)(1). See

§ 1108(a)(9) (exempting from prohibited transactions “[t]he

making by a fiduciary of a distribution of the assets of the plan

in accordance with the terms of the plan if such assets are

distributed in the same manner as provided under § [1344] . . .

.”); Lockheed Corp. v. Spink, 517 U.S. 882, 890-91 (1996)

(extending to pension benefit plans the notion that when

employers terminate employee welfare plans, they do not act as

fiduciaries and instead are analogous to settlors of a trust);

Izzarelli v. Rexene Prods. Co., 24 F.3d 1506, 1524 (5th Cir.

1994). Prior to termination, a defined benefit plan, such as the
9 “Surplus assets, or ‘residual assets’ as termed in ERISA,

are ‘assets in excess of those necessary to satisfy defined

benefit obligations . . . .’” Borst v. Chevron Corp., 36 F.3d

1308, 1311 (5th Cir. 1994) (quoting Wilson v. Bluefield Supply

Co., 819 F.2d 457, 464 (4th Cir. 1987)). 

20

one involved in the case before us, “consists of a general pool

of assets,” Hughes Aircraft, 525 U.S. at 439, and “no plan member

has a claim to any particular asset that composes a part of the

plan’s general asset pool.” Id. at 440. Instead, plan members

have a right only to their accrued benefit — a plan’s surplus9

need not be made available for distribution to plan members. See

id. at 440-41; Borst, 36 F.3d at 1315. Because an employer may,

consistent with ERISA’s provisions, receive a plan’s surplus upon

termination, the fact that the employer terminates a plan

specifically to gain access to that surplus is not a violation. 

See District 65, 576 F. Supp. at 1478 (dismissing plaintiffs’

breach of fiduciary-duty claim challenging a sponsor’s

termination of a plan in order to use the surplus to prevent a

third party from taking control of the company). 

However, simply because ERISA allows an employer to recoup

surplus assets does not mean that a fiduciary’s acts undertaken

to implement a plan’s termination may deviate from ERISA’s

command that a “fiduciary shall discharge his duties with respect

to a plan solely in the interest of the participants and

beneficiaries.” § 1104(a)(1). The question whether an employer

has access to a reversion because of a plan’s termination is
21

separate from the issue of the size of that reversion. See

District 65, 576 F. Supp. at 1478. Undertaking steps to maximize

the size of the reversion with the direct result of reducing

benefits would be a violation of ERISA’s commands. See Cooke v.

Lynn Sand & Stone Co., 673 F. Supp. 14, 27 (D. Mass. 1986)

(denying summary judgment where a material fact question existed

regarding whether sponsor had used higher interest rate to

maximize its reversion); cf. Reich v. Compton, 57 F.3d 270, 291

(3d Cir. 1995) (“[T]rustees violate their duty of loyalty when

they act in the interests of the plan sponsor rather than ‘with

an eye single to the interests of the participants and

beneficiaries of the plan’” (quoting Donovan v. Bierwirth, 680

F.2d 263, 271 (2d Cir.), cert. denied, 459 U.S. 1069 (1982))). 

The Secretary of the Department of Labor (the “Secretary”),

as amicus curiae, urges us to hold that the duty of loyalty

requires that a fiduciary disposing of plan assets as part of a

termination purchase “the safest annuity available.” 

Interpretive Bulletin Relating to the Fiduciary Standard Under

ERISA When Selecting an Annuity Provider, 29 C.F.R. § 2509.95-

1(c) (1999) (hereafter “IB 95-1” or the “Bulletin”). Although

the Bulletin was first published in March 1995 in response to the

failure of Executive Life, the Federal Register notes an

effective date for IB-95 of January 1, 1975. See Interpretive

Bulletins Relating to the Employee Retirement Income Security Act

of 1974 (hereafter “IB-ERISA”), 60 Fed. Reg. 12328, 12328 (1995). 
10 The Secretary has the power to promulgate regulations.

(continued...)

22

According to the Secretary, we owe deference to the

interpretation of ERISA’s fiduciary duties expressed in IB-95,

see Chevron U.S.A., Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984), and should apply it to RJR’s selection

of Executive Life’s annuity. 

In Christensen v. Harris County, 120 S. Ct. 1655 (2000), the

Supreme Court rejected an argument that it should give “Chevron

deference” to a Department of Labor opinion letter. Noting that

such interpretations are not “arrived at after, for example, a

formal adjudication or notice-and-comment rulemaking” and “lack

the force of law,” id. at 1662, it concluded that interpretations

in opinion letters and similar documents are instead “‘entitled

to respect’ under [its] decision in Skidmore v. Swift & Co., 323

U.S. 134, 140 (1944), but only to the extent that those

interpretations have the ‘power to persuade’.” Id. at 1663; see

also Martin v. Occupational Safety & Health Review Comm’n, 499

U.S. 144, 157 (1991) (noting that interpretive rules and

enforcement guidelines are “not entitled to the same deference as

norms that derive from the exercise of the Secretary’s delegated

lawmaking powers”). 

IB-95 is a Department of Labor interpretative bulletin that

is not the product of notice-and-comment procedures established

by the Administrative Procedure Act.10 See 5 U.S.C. § 553
10 (...continued)

See 29 U.S.C. § 1135. Under 29 U.S.C. § 1137, the rulemaking

provisions of the Administrative Procedure Act are applicable to

Title I of ERISA. 

11 The Department indicated that its advance notice 

was being published in order to obtain information and

comments from the public for consideration by the Department

in deciding whether to propose a regulation relating to the

purchase of annuity contracts for plan participants and

beneficiaries, and, if so, whether and to what extent any

such regulation should provide minimum standards for

determining whether the purchase of an annuity contract

would relieve the plan of future liability with respect to

the participant or beneficiary for whom the annuity is

purchased.

Annuitization, 56 Fed. Reg. at 28639. It acknowledged that “one

method for providing such minimum standards would be to amend 29

C.F.R. 2510.3-3(d)(2)(ii)(A). A consequence of such an approach

would be that a participant would cease to be a participant

covered under the plan only to the extent that prescribed minimum

standards are satisfied.” Id. The regulation at 29 C.F.R.

2510.3-3(d)(2)(ii) describes when an individual becomes a

participant covered under an employee benefit plan.

23

(1994). Although the Department gave advance notice of proposed

rulemaking, see Annuitization of Participants and Beneficiaries

Covered Under Employee Pension Plans (hereafter “Annuitization”),

56 Fed. Reg. 28638 (1991), the focus of that notice was not the

proper application of § 1104 to a fiduciary’s selection of an

annuity provider as part of plan terminations. Instead, the

notice described the possibility of amending existing regulations

defining the circumstances under which an individual is a

participant covered under a plan.11 See id. at 28639. After

receiving some responses, see IB-ERISA, 60 Fed. Reg. at 12329,

the Department determined that “no regulatory action should be
12 We note that nowhere in the Bulletin is the “safest

available annuity” defined, and nowhere are its identifying

characteristics described. 

24

taken at this time to amend the minimum standards under the

regulation at 29 CFR 2510.3-3(d)(2)(ii).” Id.

Rather than undertaking regulatory action, the Department,

seeing a need for “further guidance regarding the selection of .

. . annuity providers by plan fiduciaries,” published the

Bulletin. IB-ERISA, 60 Fed. Reg. at 12328. The Department noted

that the “bulletin concerns solely the fiduciary standard and is

published in addition to and independent of the regulatory

minimum standard at 29 C.F.R. 2510.3-3(d)(2)(ii).” Id. at 12329.

The Secretary’s position is that the Bulletin “announce[s] to the

public the Department’s legal view of ERISA.” Secretary’s Brief

at 17-18. Because the Bulletin is not the product of notice-andcomment rulemaking, and does not have the force of law, we apply

the standard referred to in Christensen, and determine the extent

to which the Bulletin is “entitled to respect.” Skidmore, 323

U.S. at 140. 

We begin our inquiry with a discussion of the Bulletin’s

provisions. Subsection (c) provides that in discharging its duty

of loyalty in purchasing an annuity, a fiduciary “must take steps

calculated to obtain the safest annuity available, unless under

the circumstances it would be in the interests of participants

and beneficiaries to do otherwise.”12 29 C.F.R. § 2509.95-1(c)
13 The Bulletin claims that a fiduciary could conclude

“that more than one annuity provider is able to offer the safest

annuity available.” 29 C.F.R. § 2509.95-1(c). However, under

the Bulletin’s language, where distinctions are possible a

fiduciary would be obligated to choose the “safest available

annuity” unless limited exceptions apply. The Bulletin provides

no guidance as to how that annuity is to be identified. Given

this, and given variations among insurance companies, we see it

as likely that distinctions between providers and the annuities

they offer could always be made. As a result, we question

whether a fiduciary could conclude that “more than one annuity

provider is able to offer the safest annuity available” and not

leave itself open to challenge by the Secretary. 

25

(1999). Although this would appear to impose on fiduciaries an

obligation to attempt to obtain the safest annuity, the Bulletin

also states that “there are situations where it may be in the

interest of the participants and beneficiaries to purchase other

than the safest available annuity.” Id. § 2509.95-1(d). In

cases involving overfunded plans, the Bulletin provides that a

fiduciary “must make diligent efforts to assure that the safest

available annuity is purchased.” Id. This language strongly

suggests that the Secretary interprets ERISA’s duty of loyalty as

requiring that a fiduciary selecting an annuity for purposes of

plan termination actually purchase the safest annuity, unless

circumstances of the type indicated exist.13 These circumstances

include where the safest annuity is only marginally safer yet

disproportionately more expensive and where the insurer offering

the safest annuity is unable to administer the plan. See id.

The Secretary’s brief also argues that a fiduciary under the

circumstances of this case is obligated to purchase the safest
14 Because some beneficiaries in the Plan had not yet

retired at the time of termination, completion of an obligation

to pay in full all promised benefits could occur at a time twenty

or more years in the future, when the last beneficiary died.

26

annuity available. The Secretary contends that the relevant

issue before us is not whether Executive Life was a viable or

sound candidate, as RJR argues, but instead “whether Executive

Life’s annuity was the safest available annuity.” According to

the Secretary, Shultz and Tyner acted consistently with their

fiduciary duties only if they could answer this question in the

affirmative. 

We agree with the Bulletin and the Secretary that once the

decision to terminate a plan has been made, the primary interest

of plan beneficiaries and participants is in the full and timely

payment of their promised benefits.14 We agree that

beneficiaries and participants whose plan is being terminated

gain nothing from an annuity offered at a comparative discount by

a provider that brings to the table a heightened risk of default. 

We would even add that the purchase of such an annuity can be

considered an example of the imposition on annuitants of

uncompensated risk — the risk of default is borne by the

annuitants and, in those states that have guaranty associations,

by those associations, while the benefit is granted to the

sponsor in the form of a lower price and larger reversion.

However, we are not persuaded that § 1104(a) imposes on

fiduciaries the obligation to purchase the “safest available
27

annuity” in order to fulfill their fiduciary duties. We hold

that the proper standard to be applied to this case is the

standard applicable in other situations that involve the

potential for conflicting interests: fiduciaries act

consistently with ERISA’s obligations if “their decisions [are]

made with an eye single to the interests of the participants and

beneficiaries.” Bierwirth, 680 F.2d at 271; see, e.g., Metzler,

112 F.3d at 213; Pilkington PLC v. Perelman, 72 F.3d 1396 (9th

Cir. 1995); Compton, 57 F.3d at 291; Deak v. Masters, Mates &

Pilots Pension Plan, 821 F.2d 572, 580 (11th Cir. 1987), cert.

denied, 484 U.S. 1005 (1988); Leigh v. Engle, 727 F.2d 113, 125

(7th Cir. 1984) (“Leigh I”). That standard does not require that

a fiduciary under the circumstances of this case purchase the

“safest available annuity.” Cf. Riley v. Murdock, No. 95-2414,

1996 WL 209613, at *1 (4th Cir. Apr. 30, 1996) (unpublished)

(rejecting the standard advocated by the Department of Labor). 

The Bulletin’s standard focuses on the quality of the

selected annuity. The standard we apply focuses instead on the

fiduciary’s conduct. It requires that fiduciaries keep the

interests of beneficiaries foremost in their minds, taking all

steps necessary to prevent conflicting interests from entering

into the decision-making process. See Metzler, 112 F.3d at 213

(noting that steps necessary to reduce the effects of potential

conflicts are dependent upon the circumstances); Bierwirth, 680

F.2d at 276 (stating that the conflicted trustees “were bound to
28

take every feasible precaution to see that they had carefully

considered the other side . . . .”). Although a fiduciary’s

ultimate choice may be evidence that the duty of loyalty has been

breached, the proper inquiry has as its central concern the

extent to which the fiduciary’s conduct reflects a subordination

of beneficiaries’ and participants’ interests to those of a third

party. Cf. Leigh v. Engle, 858 F.2d 361 (7th Cir. 1988) (“Leigh

II”) (“[W]hether the investments were speculative is irrelevant. 

The administrators’ breach did not consist of investment in

speculative assets. Rather, the administrators breached their

duties when they made investment decisions out of personal

motivations, without making adequate provision that the trust’s

best interests would be served.”).

3. The Duty of Care

We recently addressed an ERISA fiduciary’s duty of care in 

Laborers National Pension Fund v. Northern Trust Quantitative

Advisors, Inc., 173 F.3d 313 (5th Cir.), cert. denied sub nom,

Laborers Nat’l Pension Fund v. American Nat’l Bank & Trust Co.,

120 S. Ct. 406 (1999). The issue in Laborers was whether a

pension fund’s investment manager violated its duty of care when

it purchased interest-only mortgage-backed securities. Although

the case before us arises in a different context, we find the

discussion in Laborers instructive:
29

In determining compliance with ERISA’s prudent man

standard, courts objectively assess whether the fiduciary,

at the time of the transaction, utilized proper methods to

investigate, evaluate and structure the investment; acted in

a manner as would others familiar with such matters; and

exercised independent judgment when making investment

decisions. [ERISA’s] test of prudence . . . is one of

conduct, and not a test of the result of performance of the

investment. The focus of the inquiry is how the fiduciary

acted in his selection of the investment, and not whether

his investments succeeded or failed. Thus, the appropriate

inquiry is whether the individual trustees, at the time they

engaged in the challenged transactions, employed the

appropriate methods to investigate the merits of the

investment and to structure the investment.

Id. at 317 (alterations in original) (internal citations and

quotation marks omitted); see also In re Unisys Sav. Plan Litig.,

173 F.3d 145, 153 (3d Cir.) (“Unisys II”) (noting that the

prudence requirement focuses on whether “a fiduciary employed the

appropriate methods to investigate and determine the merits of a

particular investment”), cert. denied sub nom, Meinhardt v.

Unisys Corp., 120 S. Ct. 372 (1999); DeBruyne v. Equitable Life

Assurance Soc’y, 920 F.2d 457, 465 (7th Cir. 1990) (agreeing with

the lower court that ERISA’s duty of care requires “prudence, not

prescience”). What the appropriate methods are in a given

situation depends on the “character” and “aim” of the particular

plan and decision at issue and the “circumstances prevailing” at

the time a particular course of action must be investigated and

undertaken. 29 U.S.C. § 1104(a)(1)(B); see also Cunningham, 716

F.2d at 1467.

A fiduciary’s duty of care overlaps the duty of loyalty. 

See Bierwirth, 680 F.2d at 271. The presence of conflicting
15 The district court noted that “[a]lthough the statute

lists loyalty separately from prudence, they certainly overlap;

satisfying the prudence requirement may fulfill the duty of

loyalty.” Bussian v. RJR Nabisco, Inc., 21 F. Supp.2d 680, 685

(S.D. Tex. 1998) (citing Riley v. Murdock, 890 F. Supp. 444, 459

(E.D.N.C. 1995), aff’d, No. 95-2414, 1996 WL 209613 (4th Cir.

Apr. 30, 1996) (unpublished)). We agree that conducting an

investigation that is structured to remove the taint associated

with conflicting interests goes a long way toward satisfying the

duty of loyalty. 

30

interests imposes on fiduciaries the obligation to take

precautions to ensure that their duty of loyalty is not

compromised. As we have noted, “[t]he level of precaution

necessary to relieve a fiduciary of the taint of a potential

conflict should depend on the circumstances of the case and the

magnitude of the potential conflict.” Metzler, 112 F.3d at 213. 

To ensure that actions are in the best interests of plan

participants and beneficiaries, fiduciaries under certain

circumstances may have to “at a minimum” undertake an “intensive

and scrupulous independent investigation of [the fiduciary’s]

options.” Leigh I, 727 F.2d at 125-26 (citing Bierwirth, 680 F.2d

at 272). In some instances, the only open course of action may

be to appoint an independent fiduciary.15 See Leigh I, 727 F.2d

at 125; Bierwirth, 680 F.2d at 271-72.

With regard to the duty of care in the circumstances of this

case, IB 95-1 states that ERISA “requires, at a minimum, that

plan fiduciaries conduct an objective, thorough and analytical

search for the purpose of identifying and selecting providers

from which to purchase annuities.” Id. § 2509.95-1(c). The
31

Bulletin notes several factors that should be considered in the

search, including the “quality and diversification” of an

insurer’s portfolio, the size of the insurer, the insurer’s

exposure to liability, and the safety provided by the structure

of the annuity contract. See id. § 2509.95-1(c)(1)-(5). 

“Reliance solely on ratings provided by insurance rating services

would not be sufficient . . . .” Id. § 2509.95-1(c). The

Bulletin suggests that fiduciaries with a conflict of interest

take special precautions in a reversion situation. It exhorts

such fiduciaries “to obtain and follow independent expert advice

calculated to identify those insurers with the highest claimspaying ability willing to write the business.” Id. § 2509.95-

1(e). 

We view the Bulletin’s description of the nature of the

investigation to be undertaken in the circumstances of this case

as fully consistent with ERISA’s provisions and with courts’

holdings, including our own. See, e.g., Laborers, 173 F.3d at

317. When selecting an annuity provider to facilitate the

termination of a vastly over-funded defined benefit pension plan,

the plan’s fiduciary must structure and conduct a “careful and

impartial investigation” aimed at identifying providers whose

annuity the fiduciary may “reasonably conclude best to promote

the interests of participants and beneficiaries” of the plan. 

Bierwirth, 680 F.2d at 271. Of course, many factors must be
16 But see Brock v. Robbins, 830 F.2d 640, 646-47 (7th Cir.

(continued...)

32

weighed in determining which provider or providers are bestsuited to promote those interests.

In this regard, we find the factors enumerated in IB 95-1

instructive. The relevant inquiry in any case is whether the

fiduciary, in structuring and conducting a thorough and impartial

investigation of annuity providers, carefully considered such

factors and any others relevant under the particular

circumstances it faced at the time of decision. If so, a

fiduciary satisfies ERISA’s obligations if, based upon what it 

learns in its investigation, it selects an annuity provider it

“reasonably concludes best to promote the interests of [the

plan’s] participants and beneficiaries.” Bierwirth, 680 F.2d at

271. If not, ERISA’s obligations are nonetheless satisfied if

the provider selected would have been chosen had the fiduciary

conducted a proper investigation. See Unisys II, 173 F.3d at

153-54 (affirming district court’s holding, after a bench trial,

that a hypothetical prudent person would have invested in

Executive Life guaranteed investment contracts for an ongoing

plan); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 919 (8th

Cir. 1994) (“Even if a trustee failed to conduct an investigation

before making a decision, he is insulated from liability if a

hypothetical prudent fiduciary would have made the same decision

anyway.”).16
16 (...continued)

1987) (declining to apply the hypothetical prudent person

standard in a case where injunctive relief was sought because

“[w]hile monetarily penalizing an honest but imprudent trustee

whose actions do not result in a loss to the fund will not

further the primary purpose of ERISA, other remedies such as

injunctive relief can further the statutory interests”). 

Therefore, the relief sought may impact whether the hypothetical

prudent person standard is appropriate. 

33

A fiduciary must consider any potential conflict of

interest, such as a potential reversion of plan assets, and

structure its investigation accordingly. Engaging the services

of an independent, outside advisor may serve the dual purposes of

increasing the thoroughness and impartiality of the relevant

investigation, and of relieving the fiduciary of any taint of a

potential conflict. In the circumstances of this case, such

purposes are served when the outside advisor’s task is directed

to identifying the provider or providers that best promote the

beneficiaries’ interests.

Fiduciaries investigating annuity providers to facilitate

the termination of an over-funded defined benefit plan, like

fiduciaries in other circumstances, are entitled to rely on the

advice they obtain from independent experts. See Cunningham, 716

F.2d at 1474 (“ERISA fiduciaries need not become experts in the

valuation of closely-held stock—they are entitled to rely on the

expertise of others.”). Those fiduciaries may not, however, rely

blindly on that advice. See id. (“An independent appraisal is

not a magic wand that fiduciaries may simply waive over a
34

transaction to ensure that their responsibilities are fulfilled. 

It is a tool and, like other tools, is useful only if used

properly.”); Howard v. Shay, 100 F.3d 1484, 1490 (9th Cir. 1996)

(“Conflicted fiduciaries do not fulfill ERISA’s investigative

requirements by merely hiring an expert.”), cert. denied, 520

U.S. 1237 (1997); Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th

Cir. 1983) (“[R]eliance on counsel’s advice, without more, cannot

be a complete defense to an imprudence charge.”), cert. denied,

464 U.S. 1040 (1984); Bierwirth, 680 F.2d at 272. In order to

rely on an expert’s advice, a “fiduciary must (1) investigate the

expert’s qualifications, (2) provide the expert with complete and

accurate information, and (3) make certain that reliance on the

expert’s advice is reasonably justified under the circumstances.” 

Howard, 100 F.3d at 1489 (citing Cunningham, 716 F.2d at 1467,

1474) (other citation omitted); see also Hightshue v. AIG Life

Insurance Co., 135 F.3d 1144, 1148 (7th Cir. 1998); In re Unisys

Sav. Plan Litig., 74 F.3d 420, 435-36 (3d Cir. 1996) (“Unisys I”)

(“[W]e believe that ERISA’s duty to investigate requires

fiduciaries to review the data a consultant gathers, to assess

its significance and to supplement it where necessary.”). 

A determination whether a fiduciary’s reliance on an expert

advisor is justified is informed by many factors, including the

expert’s reputation and experience, the extensiveness and

thoroughness of the expert’s investigation, whether the expert’s

opinion is supported by relevant material, and whether the
35

expert’s methods and assumptions are appropriate to the decision

at hand. See, e.g., Hightshue, 135 F.3d at 1148; cf. Howard, 100

F.3d at 1490 (“To justifiably rely on an independent appraisal, a

conflicted fiduciary need not become an expert in the valuation

of closely held corporations. But the fiduciary is required to

make an honest, objective effort to read the valuation,

understand it, and question the methods and assumptions that do

not make sense.”). The goal is not to duplicate the expert’s

analysis, but to review that analysis to determine the extent to

which any emerging recommendation can be relied upon. Cf.

Cunningham, 716 F.2d at 1474 (holding that fiduciaries, who had

information available to them indicating that assumptions

underlying an expert’s appraisal were no longer valid, breached

their duties under ERISA by not analyzing the effect of changes

on those assumptions). 

Just as with experts’ advice, blind reliance on credit or

other ratings is inconsistent with fiduciary standards. See

Pilkington, 72 F.3d at 1400 (“Legal authority does not support

[the fiduciaries’] contention that a mere ratings scan satisfied

their fiduciary duty of loyalty to the plan.”); Unisys I, 74 F.3d

at 436-37 (citing Cunningham in support of its determination that

whether a “rating was a reliable measure of Executive Life’s

financial status under the circumstances and whether Unisys was

capable of using the rating effectively” were matters to be

decided at trial). Reviewing the ratings assigned by different
36

rating agencies may be a good place to begin the inquiry, but it

certainly is not a proper place to end it. 

As with an expert’s advice, fiduciaries must determine the

extent to which reliance on ratings is reasonably justified under

the circumstances. Some ratings agencies are more highly

regarded than others. Ratings in general reflect an agency’s

evaluation of a company, not its evaluation of a company’s

particular product line. Different agencies’ ratings reflect the

application of different methodologies. At any given time,

agencies’ ratings will vary as to their recency. As evidence in

the record before us suggests, an agency’s rating of a particular

company may be perceived by investors and industry insiders as

incorrect. Reports accompanying ratings provide fiduciaries with

a means of assessing the basis for the particular rating and of

identifying what additional information may need to be

considered. As with the use of experts, a fiduciary need not

duplicate the analysis conducted by the ratings agencies. 

However, the duty of care imposes on the fiduciary an obligation

to ascertain the extent to which the ratings can be relied upon

in making the decision at hand. 

Assuming a proper investigation has been conducted, a

fiduciary does not violate its duties under ERISA simply because

an action it determines best promotes participants’ and

beneficiaries’ interests “incidentally benefits the corporation.” 

Bierwirth, 680 F.2d at 271. Appellants charge that RJR selected
17 Price alone is not a good indicator, one way or the

other, of an annuity provider’s ability to promote the interests

of participants and beneficiaries. While a lower price may be

related to the provider’s belief that it will earn a higher rate

of return on its portfolio, which may indicate that its portfolio

contains riskier investments, its bid may also be indicative of

its ability to administer the annuity more efficiently, of its

willingness to write the business based on its business strategy,

or of its view of how the proposed obligations will compliment

its investment portfolio.

37

Executive Life because it submitted the lowest bid and in so

doing, violated its duty of loyalty. RJR does not deny that cost

was a basis for its decision, and instead contends that it could

choose the lowest-cost provider under the circumstances. Under

the standard we apply, an annuity’s price cannot be the

motivating factor until the fiduciary reasonably determines,

through prudent investigation, that the providers under

consideration are comparable in their ability to promote the

interests of participants and beneficiaries. Without such a

prior determination, consideration of an annuity’s price, because

it directly benefits the employer, can be taken as evidence that

a fiduciary has placed an interest in a reversion above the

interests of plan beneficiaries.

Of course, the comparison of annuity providers must be made

considering factors relevant to plan beneficiaries’ and

participants’ interests.17 As a general matter, we expect that a

proper investigation of potential annuity providers will reveal

that each has its own “warts.” We do not view the presence of

such blemishes, by itself, to be sufficient to cause a fiduciary
38

to eliminate those providers from further consideration. The

issue is whether a provider’s warts, viewed qualitatively and

quantitatively, are such that a prudent person in like

circumstances would determine that the purchase of that

provider’s annuity was not in the best interests of plan

beneficiaries and participants. Having concluded that all

remaining providers are comparable in their ability to serve the

best interests of plan beneficiaries and participants, a

fiduciary does not violate ERISA’s commands by subsequently

considering which provider offers its annuity at a lower price. 

C. RJR’s Compliance with its Fiduciary Obligation

 Keeping in mind the standards set forth above, we must

determine whether reasonable and fair-minded persons could

conclude from the summary judgment evidence that RJR breached its

fiduciary duties in selecting Executive Life’s annuity. Based

upon a careful review of the record in this case, we conclude

that it was inappropriate for the district court to grant summary

judgment in favor of RJR. Viewing the evidence in the light most

favorable to Appellants, a reasonable factfinder could conclude

that RJR failed to structure, let alone conduct, a thorough,

impartial investigation of which provider or providers best

served the interests of the participants and beneficiaries. Even

if the factfinder were to conclude that RJR’s investigation was
18 It may be inferred from our conclusion that we reject

the standard apparently applied below: “The plaintiffs could

show imprudence only if [RJR] knew of the problems [of Executive

Life] and what eventually would happen and then, without

additional investigation or consideration, blindly charged

ahead.” Bussian, 21 F.Supp.2d at 686.

39

appropriate, it could conclude, based on the evidence, that RJR

could not reasonably determine that Executive Life best promoted

the interests of plan participants and beneficiaries. Finally,

moving on to the hypothetical prudent person standard, a

reasonable factfinder could also conclude that Executive Life was

not an objectively reasonable choice based upon the information

RJR should have gathered.

1. The Investigation

A reasonable factfinder could conclude that RJR did not

structure or conduct an independent and impartial investigation

directed to identifying a carrier that it could “reasonably

conclude [was] best to promote the interests of participants and

beneficiaries” of the plan.18 Bierwirth, 680 F.2d at 271. Given

the decision to terminate a defined benefit plan, the primary

interest of participants and beneficiaries was in the full and

timely payment of their promised benefits. The record shows that

RJR employed Buck to assist it in selecting an annuity provider,

and looked to Buck to assess the solvency and safety of the
19 It is unclear from the record whether RJR explicitly

told Buck of its selection criteria. Tyner indicated that RJR

required that Buck identify AAA companies. Overgard, on the

other hand, stated that he assumed that RJR would want companies

that received an AAA rating from at least one agency.

40

bidding companies.19 Overgard, a Buck consultant, stated in his

deposition that his analysis of the insurers’ financial health

was limited to a review of the rating agencies’ ratings and

reports. He also stated that he had spent less time on

evaluating companies than, as Overgard put it, “on stuff that

[Buck] had been hired to do, and that is to work with the

insurance companies to get the best bids.” 

Overgard, who was responsible for compiling an initial list

of insurance companies that could provide the annuity,

determined, after a discussion with a colleague, that Executive

Life ought not be included on that list because it used a

nontraditional investment strategy that featured a high

percentage of low-quality bonds. When the list compiled by its

expert did not include Executive Life, Tyner specifically

requested that the company be added because its expected lower

bid could be used to drive down the bids of other providers. 

Tyner, at the time he requested Executive Life be included, did

not think that “Executive Life should be seriously considered in

the final bidding process.” He anticipated that another, “more

well-known” company would ultimately be selected. 
20 Although Overgard stated in his affidavit that he also

made inquiries into the reinsurance problems of Executive Life of

New York because he had learned prior to August 12, 1987 that the

company had been fined by New York regulators, he indicated in

his deposition that he did not recall whether he was aware of the

fine levied against the New York insurer, or of New York

regulators disallowing $150 million of reinsurance prior to final

bid day. He also stated in his deposition that he may have

talked to someone at Executive Life about the reinsurance issue,

but had no recollection of the conversation. Overgard’s

deposition was dated March 18, 1992; his affidavit was dated

April 21, 1992. 

41

The record contains evidence that Overgard undertook some 

investigation of Executive Life beyond his examination of the

ratings (e.g., determining that Moody’s had not talked with

Executive Life management prior to assigning its rating, talking

with investment bankers, pursuing industry intelligence).20 He

found opinions regarding Executive Life to be mixed, with some

industry insiders viewing the company’s investment strategy as

bad. Again, Overgard did not review any of Executive Life’s

financial statements, reports, or disclosures, or conduct a

special financial analysis of Executive Life or any other

provider. The record indicates that Overgard was not aware that

California regulators were looking into Executive Life’s

reinsurance practices, and did not recall whether he knew, prior

to the final bid day, that states’ regulators had capped, or were

considering capping, insurance companies’ investment in lowquality bonds. In Overgard’s opinion, positive attributes, such

as Executive Life working the case harder, being more

professional, and asking more questions, kept the company on the
21 Although Executive Life’s administrative capability is

not challenged in this litigation, the record also contains

indications that RJR did not ascertain what Overgard had done to

assess that capability. Shultz’s view that all four companies

were able to perform the contract was based on the fact that Buck

included each company on its final list.

42

list. A reasonable factfinder could conclude that Buck included

Executive Life on the final list of bidders in spite of its

nontraditional investment strategy specifically because of the

request of RJR, its client. Executive Life’s low bid could not

be used to drive down the bids of other providers unless it was

included on the final list. 

The record also includes indications that RJR did not

ascertain, prior to selecting Executive Life, what Overgard had

done to assess the safety of the companies interested in RJR’s

business other than look at the ratings, which Overgard had

provided to RJR.21 It could be concluded based on evidence in

the record that despite RJR’s request that Executive Life be

placed on the list to drive down other providers’ bids, RJR did

not ascertain the basis for Buck’s statement that the company was

“qualified.” A reasonable factfinder could also conclude that

RJR failed to assess the basis for Buck’s statement that all four

providers were “qualified” to provide the annuity, cf. Unisys I,

74 F.3d at 435-36 (concluding, when confronted with similar

evidence, that summary judgment in favor of the defendant was

inappropriate), and failed to ascertain whether Buck’s statement

meant that RJR could view each of the companies as comparable. 
22 There is arguably a fact question as to which of the

ratings RJR relied upon. For example, Tyner stated in his

deposition (1) that all four ratings were used, (2) that the

Moody’s rating was ignored, and (3) that the S&P rating was the

main criterion. Shultz suggested that three ratings were used: 

S&P’s, Conning’s and Best’s. 

23 In evaluating Executive Life for purposes of the earlier

bidding on guaranteed investment contracts, Tyner looked only to

the provider’s ratings. 

24 The court below suggested that the investigation

undertaken by RJR was similar to that undertaken by the defendant

in Riley v. Murdock, 890 F. Supp. 444 (E.D.N.C. 1995). See

Bussian, 21 F.Supp.2d at 685. We disagree with this assessment. 

The defendant in Riley undertook an extensive independent

investigation:

(continued...)

43

Focusing on whether RJR undertook activities to investigate

the safety of the carriers interested in bidding, a reasonable

factfinder could conclude that the company relied entirely on

ratings that Buck provided it.22 The record indicates that RJR

looked to those ratings to examine the safety of Executive

Life.23 Both Shultz and Tyner stated that they had not read the

accompanying reports. Tyner assumed that negative information

that existed would be reflected in agency ratings. In his

deposition, Tyner stated that to his knowledge, no one checked

why Moody’s had given Executive Life a lower rating. Tyner also

stated that he did not look at Executive Life’s annual reports or

SEC filings. As with Buck’s recommendation, a factfinder could

conclude that RJR failed to assess the extent to which it was

justified in relying upon the ratings assembled by Buck, and that

the bulk of RJR’s investigation was a review of those ratings.24
24 (...continued)

The committee also retained a law firm and conducted its own

investigation of each insurance company that bid on the

annuity contract. This investigation included: (1) a

financial analysis; (2) personal contact with the companies’

senior management; (3) a review of financial statements,

quarterly reports and other relevant financial documents;

(4) consultation with Conning & Company, a firm specializing

in the evaluation of insurance companies; (5) consulting

with independent sources about Executive Life; and, (6)

consulting with other companies that had bought annuity

contracts from Executive Life. The committee also relied on

the fact that Executive Life had received a high rating in

1986 from A.M. Best, the preeminent authority rating

insurance companies. The committee also knew that Executive

Life received a AAA rating from Standard & Poor’s, the

highest rating that company gives, and the stock of its

parent company was also highly rated. The committee also

made certain that Executive Life had the administrative

capabilities to oversee disbursement of Plan funds.

Riley, 890 F. Supp. at 458 (citations omitted). In reproducing

this list of activities, we do not intend to suggest that a

fiduciary must, in all circumstances, undertake each activity. 

We wish merely to highlight the substantial difference in the

nature of the independent investigation undertaken in Riley and

that undertaken by RJR. 

44

A factfinder could conclude that the absence of an

independent investigation by RJR is made more egregious by the

fact that Shultz (who bore the responsibility for making the

final decision on behalf of RJR) apparently possessed a good deal

of information about Executive Life and the emerging problems in

the market for low-quality bonds. See Part I supra. Yet he did

nothing to ascertain whether Tyner was in possession of that

information, let alone whether he had conducted further

investigation (either personally or through Buck) to determine
45

that Executive Life was a provider qualified to be on the final

list. 

A factfinder could conclude that as far as RJR knew on

August 12, 1987, its investigation of the providers involved (1)

hiring Buck, which scanned the ratings, and (2) scanning the

ratings itself. RJR asserts that this represents the normal

investigation undertaken at the time by fiduciaries purchasing

annuities from insurance companies that are heavily regulated by

the states, and points to a statement of one of its experts, who

had not acted as a fiduciary, for support for this contention.

However, the record also contains statements from Appellants’

experts, three of whom had acted as a fiduciary, that RJR’s

practices breached its fiduciary duties. Given this case is

before us on summary judgment, we leave to the factfinder the

task of making credibility assessments. See Anderson, 477 U.S.

at 255 (“Credibility determinations, the weighing of the

evidence, and the drawing of legitimate inferences from the facts

are jury functions, not those of a judge, whether he is ruling on

a motion for summary judgment or for a directed verdict.”). We

note that a reasonable factfinder could conclude from the

evidence that application of the “normal” investigation was not

sufficient under the circumstances. Executive Life’s investment

strategy deviated significantly from the norm, was comparatively

untested, and was the subject of debate among industry insiders. 
46

Moreover, evidence in the record suggests that some investors

viewed Executive Life’s S&P rating as incorrect. 

In short, a reasonable factfinder could conclude from

evidence in the record that RJR made an insufficient attempt to

identify which provider or providers was best positioned to

promote the interests of the participants and beneficiaries. 

Based upon its lack of understanding of the basis for Buck’s

statement that all four bidders on the final list were

“qualified,” its failure to assess the extent to which ratings

could be reasonably relied upon, and its failure to consider

factors beyond ratings provided by Buck, a reasonable factfinder

could conclude that RJR failed to structure and conduct a prudent

investigation. Even if it had long been the practice of those

purchasing annuities to rely solely on a ratings scan, a

factfinder could conclude that such an investigation was

inappropriate in light of lack of experience that the industry,

and its regulators, had with Executive Life’s investment

strategy. Were a factfinder to conclude that RJR’s investigation

was inadequate under the circumstances, RJR would no longer be

entitled to rely on the reasonableness of its final selection

based upon the information its investigation produced. 

Even if RJR’s investigation were to be found proper, a

reasonable factfinder could conclude that RJR, based on the

information it had, was unreasonable in considering the four

providers comparable in their ability to serve the interests of
47

plan beneficiaries and participants. The record indicates that

the four companies were identical in only one dimension — the

ratings given by S&P. Beyond this, there was variation in the

ratings given to the four companies, with Executive Life

receiving a Moody’s rating two grades lower than AAA. A

factfinder could conclude that Shultz was aware of a number of

facts regarding Executive Life, including that over 50% of its

portfolio was in low-quality bonds, that in this way Executive

Life was unusual among insurance companies, and that there was

mixed opinion regarding both Executive Life’s strategy

(involving, as it did, investing over 50% of its portfolio in

low-quality bonds) and the soundness of investing in low-quality

bonds generally. Shultz understood the connection between Drexel

and Executive Life, and that Executive Life came within the scope

of then-ongoing government investigations. Shultz had not seen

the same variation in views of the other companies as he had seen

with Executive Life. There is evidence in the record that of the

final four companies, RJR first used price to reduce the field to

two, and then simply went with the lowest bidder. For example,

Aetna was dropped from consideration midday because of price;

Prudential and Executive Life were considered further because

they were the low bidders. Executive Life was chosen over

Prudential because of price. From this, and other evidence in
25 For example, when Tyner was asked if, taking price out

of consideration and assuming that Aetna, Prudential and

Executive Life had an AAA rating, he had also known of eight

publicly available facts about Executive Life and the market for

low-quality bonds (e.g., the percentage of Executive Life’s

portfolio in low-quality bonds, the relationship between First

Executive and Drexel, the fine on Executive Life of New York,

California regulators’ examination of $188 million of Executive

Life’s reinsurance, that California regulators were considering

capping insurance companies’ investment in low-quality bonds), it

would be prudent to choose Executive Life, Tyner responded,

“Well, if all other things are equal, then it would obviously be

better to go with another one but all other things weren’t equal

. . . There was a difference in price.” 

48

the record,25 a reasonable factfinder could conclude that RJR

placed its interests in the reversion ahead of the beneficiaries’

interests in full and timely payment of their benefits. 

2. The Hypothetical Prudent Person Standard

Similarly, a reasonable factfinder could conclude that

Executive Life was not an appropriate choice based upon the

investigation that RJR should have conducted. There is evidence

that many voices in the industry had concerns about Executive

Life’s investment strategy — a strategy that was substantially

different from that used by the industry and that had not stood

the test of time. As such, there was more uncertainty (and more

associated risk) with Executive Life than with the other

candidates. A factfinder could conclude on this basis alone that

a prudent person would not select Executive Life’s annuity over

the annuities offered by those candidates.
49

The record supplies the factfinder with considerable

additional evidence that leads to the same conclusion. A

factfinder could conclude from evidence in the record that the

vast majority of insurance companies at the time rejected the

type of investment strategy that Executive Life had adopted,

despite Executive Life’s ability to underbid other firms and

their resulting economic incentive to adopt a similar strategy. 

Evidence in the record also suggests that some were critical of

S&P giving a high rating to Executive Life, that Duff & Phelps

gave the company its ninth rating, and that Moody’s had assigned

its lower rating to Executive Life in part because of the quality

of its bonds. Moreover, Executive Life was, during the relevant

period, under investigation by both New York and California

regulators. New York regulators had levied a hefty fine against

Executive Life’s New York subsidiary, and had placed a cap (of

20%) on the low-quality bond holdings of insurance companies that

state regulated. Documentation filed by First Executive

indicated that the company saw adoption of caps by New York

regulators as threat to its future growth, competitiveness, and

profitability. Other states’ regulators, including those in

California, were considering capping investment in such bonds. 

Although evidence was presented that investment banking firms (in

addition to Drexel) were eager to make a market in low-quality

bonds, there is also evidence that the low-quality bond market as

a whole would suffer as a result of investigations of Drexel that
50

were ongoing at the time RJR chose Executive Life. There is

evidence that one reputable consultant had removed Executive Life

from its Approved List in 1985. A reasonable factfinder could

conclude that an appropriate investigation would have revealed

this information and that such information, when weighed against

the information that should have been gathered on other

providers, would cause a fiduciary to eliminate Executive Life as

a final candidate well before price could be legitimately

considered. Cf. Pilkington, 72 F.3d at 1401-02 (holding that

summary judgment in favor of defendant was inappropriate where

evidence in the record indicated the investigation of Executive

Life relied on a “mere ratings scan,” that “voices in the

insurance industry had expressed misgivings about the soundness

of those ratings,” and that “reversion maximization figured

prominently in [the sponsor’s] spin-off/plan termination

decision”); Unisys I, 74 F.3d at 435-37 (holding that summary

judgment in favor of the defendant was inappropriate given, inter

alia, evidence that allowed a factfinder to infer that Unisys

“failed to analyze the bases underlying [its expert’s] opinion of

Executive Life’s financial condition and to determine for itself

whether credible data supported [the expert’s] recommendation,” a

subsequent investigation “consisted of nothing more than

confirming that Executive Life’s credit ratings had not changed,”

and evidence in the record that raised issues as to whether

reliance on ratings was justified). 
26 For the same reasons, the district court’s ultimate

finding in Bruner v. Boatmen’s Trust Company, 918 F. Supp. 1347,

1354 (E.D. Mo. 1996), that plan fiduciaries had breached their

duties under ERISA by investing a significant portion of plan

assets in Executive Life guaranteed investment contracts is not

dispositive. 

51

Given the factual differences between the two cases and the

fact-specific nature of our inquiry, we do not view Unisys II,

173 F.3d 145 (3d Cir. 1999), as dictating a different conclusion. 

In that case, the court affirmed the lower court’s determination,

after a bench trial and additional findings of fact, that the

fiduciaries’ purchase of Executive Life guaranteed investment

contracts did not violate ERISA. We note that although those

fiduciaries were buying products sold by Executive Life, they

were not buying an annuity to facilitate the termination of a

defined benefit pension plan. The investments at issue

constituted only 15-20% of a fund that was just part of the

retirement plan at issue in that case. See id. at 152 n.10. As

a result, we do not find Unisys II’s ultimate conclusion

dispositive.26

For similar reasons, we also do not regard Riley v. Murdock,

890 F. Supp. 444 (E.D.N.C. 1995), aff’d, No. 95-2414, 1996 WL

209613 (4th Cir. Apr. 30, 1996) (unpublished), as dispositive. 

In that case, as in this, an Executive Life group annuity was

purchased to facilitate the termination of an over-funded defined

benefit pension plan. The Riley court explained that to assess

prudence it first inquired “whether the fiduciary employed the
52

appropriate methods to diligently investigate the transaction.” 

890 F. Supp. at 458. Next, it determined whether “the decision

ultimately made was reasonable based upon the information

resulting from the investigation.” Id. The court detailed the

extensive actions taken by the fiduciaries in that case,

explained that the plaintiffs had presented no evidence that the

fiduciaries should have known about problems with Executive Life

in 1986, and concluded, “[a]ll of these efforts establish that

[the fiduciaries] thoroughly investigated the purchase of the

annuity from Executive Life and that the decision to purchase was

reasonable based on the results of that investigation.” Id.

(emphasis added). 

The Riley court’s conclusion can not be translated into a

pronouncement that the purchase of an Executive Life group

annuity to facilitate plan termination was objectively reasonable

in 1987 regardless of the investigation conducted. Not only did

RJR have an additional year of information available to it, but

the Riley court never addressed the objective prudence of a

decision to invest in an Executive Life group annuity. Finding

that the fiduciaries in that case conducted a prudent

investigation and that their decision was reasonable based upon

that investigation, the Riley court did not have cause to apply

the hypothetical prudent person standard.
53

III. CLASS CERTIFICATION

 The district court denied the motion to certify a class for

the reason that “neither of the named plaintiffs will recover

anything by this suit.” Bussian, 21 F. Supp.2d at 684. We have

concluded that summary judgment was inappropriate. Under the

circumstances, it seems appropriate to vacate the district

court’s order denying class certification and allow it to

consider the issue more fully on remand.

IV. CONCLUSION

For the foregoing reasons, the grant of summary judgment in

favor of RJR is REVERSED, and the order denying class

certification is VACATED. The case is REMANDED to the district

court. Costs shall be borne by RJR.