Putnam Beats Class Action Over In-House 401(k) Investments

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By Jacklyn Wille

Putnam Investments LLC defeated a class action challenging the allegedly high-fee proprietary investment funds in the company’s 401(k) plan ( Brotherston v. Putnam Invs., LLC , 2017 BL 208765, D. Mass., No. 1:15-cv-13825-WGY, 6/19/17 ).

After a seven-day bench trial, a federal judge said the Putnam workers failed to identify any specific circumstances in which the company and its 401(k) plan put their own interests ahead of plan participants’. The workers also failed to show how Putnam’s allegedly imprudent actions—which included failing to monitor plan investments and remove those that were imprudent—caused them losses, the judge said in the June 19 decision.

In the past three years, more than two dozen financial companies—including JPMorgan Chase Bank, Charles Schwab Corp., and Morgan Stanley—have been targeted by proposed class actions challenging the in-house investment products in their workers’ 401(k) plans.

This decision favoring Putnam is the first to be reached after trial and the second victory for a financial company, after Wells Fargo won dismissal of a similar case in May. Many judges have ruled against the financial company defendants, refusing to dismiss cases against BB&T Corp., Allianz, Deutsche Bank, Franklin Resources, American Century, and Edward Jones. Within the past week, the case against Allianz was certified as a class action, and a new lawsuit was filed against Capital Group Cos., the company that sponsors the American Funds.

Judge’s Analysis

In this case, the judge rejected the novel claim that the Putnam plan fiduciaries acted imprudently by putting Putnam-affiliated funds in the plan that weren’t included in any other large retirement plans. The workers said this was evidence that the funds were chosen not for their intrinsic merit but because they earned fees for Putnam, but the judge disagreed.

“The prudence of the Plan’s investments is measured against what a prudent investor would do in Putnam’s shoes,” he wrote. It’s therefore “irrelevant” whether Putnam’s competitors invested in Putnam funds, the judge said.

The judge also discussed loss causation under the Employee Retirement Income Security Act, an issue that has split the federal appeals courts. The Fourth, Fifth, and Eighth circuits hold that after an ERISA fiduciary is shown to have breached its duties, the legal burden shifts to the fiduciary to show that the breach was harmless. The Sixth, Ninth, Tenth, and Eleventh circuits have held that parties bringing ERISA fiduciary breach claims must prove each element of their claims, including loss causation.

Here, the judge said he was adopting the burden-shifting framework used by the minority of courts, but he cautioned that this was done “only for the purposes of this analysis.” Because the Putnam workers failed to show a loss in the first instance, their fiduciary breach claim failed, the judge determined.


Carl F. Engstrom, an attorney with Nichols Kaster in Minneapolis and counsel for the Putnam workers, said his firm would appeal the decision.

“We respectfully disagree with the ruling and plan to appeal,” Engstrom told Bloomberg BNA. “We believe the decision is an anomaly that will have little if any effect on the other proprietary fund lawsuits in which our firm is involved.”

Putnam’s attorney praised both the decision and the company’s management of its 401(k) plan.

“We are very pleased with the Court’s decision that the plan was managed with the best interests of plan participants in mind,” Michael Hines, a partner with Skadden, Arps, Slate, Meagher & Flom in Boston, told Bloomberg BNA in an email. “As we established early on in this case, the 401(k) plan at issue is a good plan and well-designed.”

A spokesman for Putnam also praised the ruling, saying, “We are pleased with the decision and know it was the right result.”

Judge William G. Young of the U.S. District Court for the District of Massachusetts wrote the decision. In previous rulings, Young denied Putnam’s motion to dismiss and certified the case as a class action on behalf of about 6,000 workers. Neither ruling included a lengthy discussion of the reasons behind Young’s decision.

Nichols Kaster PLLP and Block & Leviton LLP represented the Putnam workers. Skadden Arps Slate Meagher & Flom LLP represented Putnam.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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