Investors in Putnam Investments LLC’s 401(k) plan will get another chance to show the company profited at the expense of their retirement savings by putting Putnam-affiliated mutual funds in the plan.
The U.S. Court of Appeals for the First Circuit ordered a district court judge to reconsider whether Putnam’s handling of its 401(k) investment lineup was imprudent under the Employee Retirement Income Security Act. In the Oct. 15 ruling, the First Circuit took the pro-employee side in a burgeoning circuit split. The First Circuit joined the Fourth, Fifth, and Eighth circuits in holding that once an ERISA plan participant shows a loss allegedly tied to a plan fiduciary’s imprudent behavior, the burden then shifts to the fiduciary to show that the loss wasn’t caused by the fiduciary. The Sixth, Ninth, Tenth, and Eleventh circuits have held differently.
The lower court’s decision in favor of Putnam was the first post-trial ruling in a recent series of cases challenging financial companies that put their own investment products in their workers’ 401(k) plans. Many cases have led to early losses for the financial companies, with courts granting early wins to employees of BB&T Corp., Deutsche Bank, Franklin Templeton, American Century, and Edward Jones. In the Putnam case, the judge ruled after a seven-day trial that the workers failed to identify any specific circumstances in which the company and its 401(k) plan put their own interests ahead of the workers.
Attorneys for the Putnam investors praised the First Circuit’s ruling, calling it an “important victory” for employees covered by the decision.
“The First Circuit’s adoption of a burden-shifting framework on the issue of loss causation in ERISA breach of fiduciary duty cases—once a fiduciary breach and related loss have been demonstrated by plaintiffs—represents an important victory for the millions of employees in Massachusetts, New Hampshire, Rhode Island, Maine, and Puerto Rico whose hard-earned savings are held in a 401(k)-style plan, and may be vulnerable to the effects of imprudent and self-interested conduct by the fiduciaries of those plans,” attorneys for the Putnam plan investors told Bloomberg Law in a joint statement via email. “We also believe the Court’s guidance regarding the proper methodology for measuring loss in defined contribution fiduciary breach cases will serve as useful and persuasive guidance for courts around the country. We look forward to resuming the trial in this matter.”
A Putnam spokesman expressed confidence that the company would ultimately prevail in the case.
“While we are disappointed with some parts of the Court’s decision, ultimately, we are confident that we will prevail again when we have the opportunity to present our evidence at trial,” Jon Goldstein, head of corporate communications for Putnam, told Bloomberg Law in an email.
Case Sent Back
The First Circuit also spoke approvingly of portions of the expert report the investors relied on in arguing the Putnam funds were too expensive. This report, which compared some of Putnam’s actively managed funds with Vanguard’s passively managed funds and found that Putnam investors may have overpaid by more than $30 million, may be sufficient to show that the Putnam investors suffered a loss, the First Circuit said.
The court also instructed the district judge to reconsider whether the Putnam defendants engaged in a transaction between the plan and a plan fiduciary that is prohibited by ERISA. The district judge found no prohibited transaction even though Putnam workers argued that the company had more favorable arrangements with outside investors. In so ruling, the district judge focused on the fact that the discretionary contributions Putnam made into employees’ 401(k) accounts exceeded any additional benefits that outside investors would have received.
The First Circuit rejected this analysis, explaining that Putnam made those contributions as an employer and not as an ERISA fiduciary, making them irrelevant to the question of whether the company properly discharged its fiduciary duties.
However, the First Circuit agreed with the district court’s dismissal of claims that Putnam defendants acted disloyally and engaged in certain prohibited transactions.
Nichols Kaster represented the investors. Skadden Arps Slate Meagher & Flom LLP represented Putnam.
The case is Brotherston v. Putnam Invs., LLC, 1st Cir., No. 17-1711, opinion 10/15/18.