We now know the terms of settlement in an excessive fee suit that highlighted—but ultimately didn’t resolve—an apparent split between the nation’s courts in establishing who bears the burden of proof in ERISA litigation.
The original 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.”
The Settlement
The settlement (John Brotherston et al. v. Putnam Investments LLC et al., case number 1:15-cv-13825, in the U.S. District Court for the District of Massachusetts) notes that the $12,500,000 settlement amount “is a significant monetary recovery for the Class and falls well within the range of court-approved settlements in similar ERISA case,” describing it as “substantial not only in the aggregate, but also on a per-participant basis (approximately $2,000 per Class Member) and as a percentage of Plan assets (1.9%).”
Moreover, it states that the settlement “compares favorably” to other recent class action settlements involving 401(k) plans. “The $12.5 million recovery represents approximately 28% of the total damages that Plaintiffs’ expert testified were associated with Defendants’ alleged fiduciary breaches.”
Additionally, the settlement states that the general structure of the settlement is “similar to that already approved by this court “in another ERISA case involving proprietary funds, where Defendants’ current counsel was also counsel for the defense.”
As for allocating that settlement, the agreement calls for weighting the account balances invested in the proprietary funds affiliated with Putnam four times more heavily than balances in non-proprietary funds (an approach the settlement notes was “consistent with the settlement this Court recently approved in Eaton Vance, a similar ERISA suit that focused on proprietary funds within a 401(k) plan”). Former participants can submit a Rollover Form allowing them to have their distribution rolled over into an individual retirement account or other eligible employer plan—those who don’t submit a form by the deadline will be sent a check. The settlement takes pains to highlight that “under no circumstances will any monies revert to Putnam. Any checks that are uncashed will revert to the Qualified Settlement Fund and will be paid to the Plan for the purpose of defraying administrative fees and expenses.”
More Than Money
The settlement involves more than money, however. It also provides for a number of additional procedural changes to the management of the Putnam plan for at least the next two years, specifically that the defendants will:
- maintain a charter for the Putnam Benefits Oversight Committee (PBIC) that outlines the duties and fiduciary responsibilities of the PBIC and establishes its general quarterly meeting schedule;
- maintain an investment policy statement for the Plan;
- maintain a suite of low-cost third-party passive collective investment trust (“CIT”) options in the Plan; and
- arrange annual training on ERISA fiduciary duties for Plan fiduciaries.
Moreover, the settlement agreement states that the PBIC will meet no less than quarterly, and such meetings shall include two meetings a year to review Putnam options in the Plan, with Putnam senior investment representation attending to review the funds; one meeting a year to review the third party passive CIT options in the Plan with representatives of the third party CIT provider(s); one meeting a year to review the Plan’s Qualified Default Investment Alternatives; and one meeting a year to review PanAgora options in the Plan with PanAgora representatives.
All in all, the settlement agreement notes that “these changes are intended to address the allegedly defective procedures that Plaintiffs identified regarding Defendants’ process for managing the Plan’s investment lineup, and remedy specific conduct cited by the Court in connection with the partial trial of this matter.”
While the proposed fee for the plaintiffs’ counsel (Nichols Kaster PLLP and Block & Leviton LLP) was not stated, the agreement “requires that Class Counsel file their Motion for Attorneys’ Fees and Costs at least 14 days before the deadline for objections to the proposed Settlement.” The Settlement also provides for “service awards” for the plaintiffs named in the case for “up to $25,000 per Class Representative, subject to Court approval.”
What This Means
With all the dust (now) settled, the proposed terms of this potentially momentous case seem to fall well within settlement “norms,” even the (relatively modest) commitments to certain procedural changes (although the agreed addition of a “suite” of collective trust options to the plan’s investment menu is unusual).
Left unresolved is the apparent split[i] in the courts regarding which party bears the burden of proof on damage causation, not to mention the implied notion that passively managed index funds can be appropriate benchmarks for establishing losses from the improper monitoring of actively managed funds. Remember that in the original appellate decision, Judge William J. Kayatta, Jr. shrugged off arguments that the shift in burden of proof would undermine plan formation and encourage litigation by claiming that “…any fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds.”
All of which means that case may have been settled—but the key issues it raised will linger for another day—and trial. And, as even this settlement agreement acknowledges, “It is well-recognized that ERISA 401(k) cases such as this “often lead[] to lengthy litigation.”
[i]The defendants here—Putnam Investments, LLC—had prevailed at the district court level, only to have that ruling appealed, and to find that the appellate court adopted a different view of which party bore the burden of proof. That court aligned itself with the Fourth, Fifth, and Eighth Circuits, holding 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.” That decision, which was not only a shift from the position previously adopted by the First Circuit, but was also, the defendants argued, different than decisions in the Second, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits, which had left that burden on those bringing suit. Be that as it may, the U.S. Supreme Court didn’t see it that way. Rather, in the high court's view, the lower courts hadn’t really confronted the issue, though the Court acknowledged that the Second, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits have left that burden on those bringing suit. All that said, the Supreme Court, having found nothing to resolve, sent the case back down to the district court where those issues of fact could be fully adjudicated.
