A federal judge has ruled that while their “review of the Plan lineup was no paragon of diligence,” a group of participant-plaintiffs “…failed to point to specific circumstances in which the Defendants have actually put their own interests ahead of the interests of Plan participants.”
The case, Brotherston v. Putnam Investments, LLC (2017 BL 208765, D. Mass., No. 1:15-cv-13825-WGY, 6/19/17), was filed against Putnam Investments by participants in that plan, alleging that the defendants “have loaded the Plan exclusively with Putnam’s mutual funds, without investigating whether Plan participants would be better served by investments managed by unaffiliated companies.”
District Judge William G. Young followed up on his March 2017 decision in which, in dismissing a number of counts, he ultimately holding that there were “genuine issues of material fact in dispute.” Those have now been resolved, resulting in the dismissal of the remaining counts in the suit as well.
In the most recent ruling, Judge Young ruled not only that the plaintiffs failed to identify any specific circumstances in which the company and its 401(k) plan put their own interests ahead of the interests of plan participants, but that the plaintiffs failed to show how Putnam’s allegedly imprudent actions resulted in losses that required compensation.
Failure to Monitor, Remove?
Those actions included failing to monitor plan investments (though the judge noted that “PBIC, the Plan’s named fiduciary, meets on a regular basis to monitor the Plan’s investment options”) and remove those that were imprudent (the judge noted that, for a period of time, PBIC reviewed reports compiled by the Advised Asset Group (a subsidiary of Great-West), and though the AAG Reports showed that a number of Putnam funds were given “fail” ratings, after internal discussions, PBIC determined that the AAG Reports did not provide an accurate indication of fund performance. Judge Young said it was “undisputed that PBIC followed a prudent process in reviewing and monitoring the QDIA funds,” and further acknowledged a process that was applied in adding a “core lineup” of passive index funds into the plan, that included options that Putnam did not offer.
Not that there weren’t issues – Judge Young noted that, “in contrast to the review process applied to the QDIA and DIA funds, PBIC appeared to rely entirely on the expertise of the investment division to determine whether a fund was failing and needed to be shut down,” and that “as a result, PBIC did not seem to have independent standards or criteria for monitoring the Plan investments.” In fact, he noted that PBIC “never once removed a fund from the Plan lineup.” Nor did he find any record of a separate discussion within the investment division as to whether a particular fund was appropriate for the plan.
However, Judge Young noted that while these practices “do not eliminate the Defendants’ ability to breach the duty of loyalty, the Plaintiffs have failed to point to specific circumstances in which the Defendants have actually put their own interests ahead of the interests of Plan participants.” He went on to write that the plaintiffs’ duty of loyalty claims are “reduced almost exclusively to identifying instances of self-dealing,” but that “…pointing to self-dealing alone is insufficient for the Plaintiffs to meet their burden of persuasion to show by a preponderance of the evidence a breach of the fiduciary duty of loyalty, particularly where the practices are common within the industry,” leading him to, after “evaluating the totality of the circumstances, the Court holds that the Defendants have not breached the duty of loyalty owed to the Plaintiffs’ class.”
Judge Young also held that the fiduciaries failure to remove funds that had received “fail” designations was “…insufficient to carry the Plaintiff’s burden of persuasion with respect to the claim of breach,” while also noting that “the record reflects the Investment Division's highly sophisticated, systematic review of all Putnam mutual funds.”
That said, and while noting that there is no “uniform checklist” for procedural prudence, Judge Young said that “prudence requires more than blindly to defer to the decisions of someone else, no matter how qualified," and that “closely monitoring Putnam’s mutual funds is not the same as closely monitoring the Plan’s lineup,” even by individuals who served on both the fund board and the plan committee.
He noted that the “seemingly informal delegation of that function to Putnam’s investment division does not seem sufficient to discharge PBIC of its demanding fiduciary duty,” but said that “it is perfectly conceivable that the Defendants would present compelling evidence that they were in fact in full compliance with their ERISA fiduciary duties.”
Judge Young noted that the plaintiffs’ argument that PBIC’s alleged lack of an “objective process” to monitor the plan investments makes the entire plan lineup imprudent was a non sequitur. “Indeed, a person could lack an independent process to monitor his investment and still end up with prudent investments, even if it was the result of sheer luck,” he wrote, noting that, however, in the present case “…luck seems to have little to do with the Plan lineup.”
Judge Young concluded that “PBIC’s review of the Plan lineup was no paragon of diligence. But because the Plaintiffs have failed to establish a prima facie case of loss, the Court further declines to grant other declaratory or injunctive relief,” and entered judgment for the defendants on all remaining counts.
