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April 8 — Both Fidelity Management Trust Co. and Putnam Investments LLC must defend lawsuits accusing them of charging high 401(k) fees and using unwise investment strategies.
In an unusual move, a federal judge in the U.S. District Court for the District of Massachusetts April 7 issued a three-page order allowing two different proposed class actions to survive the companies' motions to dismiss. The judge didn't explain the reasoning behind his decision, other than to say that “dismissal is often inappropriate” in “factually complex” lawsuits under the Employee Retirement Income Security Act.
Kai H. Richter, an attorney with Nichols Kaster PLLP who represents the workers suing Putnam, told Bloomberg BNA April 8 that he was pleased with the court's decision and that he thinks his clients “have a strong case on the merits.”
Although both lawsuits involve allegations of excessive plan fees, they use different lines of attack. The Fidelity lawsuit focuses on the investment strategy of the company's stable value fund, and the Putnam lawsuit challenges the use of proprietary funds in Putnam's own 401(k) plan.
In the lawsuit against Fidelity, a proposed class of workers who invest in Barnes & Noble's 401(k) plan accuse Fidelity of charging excessive fees and mismanaging one of the stable value fund it sells to 401(k) plans.
The workers allege that Fidelity responded to losses incurred during the 2008 financial crisis by adopting an overly conservative investment strategy meant to appease the company's “wrap providers”—which include AIG Financial Products, JP Morgan Chase Bank and State Street Bank—at the expense of the workers who invest in the stable value fund . According to the complaint, these wrap providers issued contracts guaranteeing that stable value fund investors would receive a particular interest rate on top of their underlying investment.
In moving to dismiss, Fidelity called the lawsuit a “broadside attack on a fully disclosed investment strategy” and a “classic hindsight challenge.”
The lawsuit against Putnam makes different claims, attacking the company's alleged practice of loading its own 401(k) plan with in-house mutual funds that earn high fees for the company.
That lawsuit also accuses Putnam of including poorly performing funds and funds with “little or no track record” in the plan.
Putnam disputed these allegations, arguing that the Department of Labor has blessed its practice of including proprietary mutual funds in its 401(k) plan. The claims of excessive fees were “based solely on hindsight,” Putnam contended.
Despite its brevity, Judge William G. Young's order denying the companies' motions to dismiss was noteworthy in several respects.
In particular, Young cited the U.S. Supreme Court's 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 58 EBC 1405 (U.S. 2014), in finding that the workers had alleged “facts sufficient to state plausible claims” .
Although Dudenhoeffer established pleading standards for certain types of ERISA class actions, that case was primarily concerned with plans that invest in employer stock, unlike the 401(k) plans at issue here.
Young's order also noted that the standard of judicial review in an ERISA case is “de novo” unless certain conditions are satisfied. This standard is more often seen in lawsuits challenging individual benefit denials, as opposed to the planwide claims of excessive fees and mismanagement alleged here.
Goodwin Procter and O'Melveny & Myers LLP represent Fidelity. Zelle LLP, Righetti Glugoski PC and Schneider Wallace Cottrell Konecky Wotkyns LLP represent the workers suing Fidelity.
Skadden Arps Slate Meagher & Flom LLP represents Putnam. Nichols Kaster PLLP and Block & Leviton LLP represent the workers suing Putnam.
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