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Compliance January 22, 2019
Putnam Asks Supreme Court to Weigh In On Fund Comparisons in ERISA Cases
The question was included in its petition for writ of certiorari asking the Supreme Court to settle a circuit split about burden of proof in ERISA cases.
Reported by Rebecca Moore
Putnam Investments has filed a petition for writ of certiorari with the U.S. Supreme Court asking it to settle questions in a case in which it was accused of engaging in self-dealing by including high-expense, underperforming proprietary funds in its own 401(k) plan.
The U.S. District Court for the District of Massachusetts, last year, ruled for Putnam. However, “finding several errors of law in the district court’s rulings,” the 1st U.S. Circuit Court of Appeals vacated the District Court’s judgment in part and remanded the case for further proceedings. In its opinion, the Appellate Court said “we align ourselves with the Fourth, Fifth, and Eighth Circuits and hold that once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that such loss was not caused by its breach, that is, to prove that the resulting investment decision was objectively prudent.”
Putnam asked, and the Appellate Court agreed, to stay the case pending the filing and disposition of a petition for a writ of certiorari to the Supreme Court.
However, in addition to asking the high court to weigh in on whether the plaintiff or the defendant bears the burden of proof on loss causation under Employee Retirement Income Security Act (ERISA) Section 409(a), Putnam asked the court to determine “whether, as the First Circuit concluded, showing that particular investment options did not perform as well as a set of index funds selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.”
Notably, in his decision in the case, U.S. District Judge William Young of the U.S. District Court for the District of Massachusetts found the comparison of the Putnam mutual funds’ average fees to Vanguard passively managed index funds’ average fees flawed. Vanguard is a low-cost mutual fund provider operating index funds “at-cost.” Putnam mutual funds operate for profit and include both index and actively managed investments. Young said the expert’s analysis “thus compares apples and oranges.”