Brotherston v. Putnam Investments
907 F.3d 17
1st Cir.2018Background
- Putnam Investments ran its 401(k) Plan that largely offered proprietary Putnam mutual funds (over 85% of Plan assets from 2009–2015); PBIC was the named fiduciary responsible for selecting and monitoring Plan investments.
- From Nov. 2009 through Jan. 31, 2016, PBIC added no non‑Putnam mutual funds to the Plan lineup (non‑affiliated options were only available via a self‑directed brokerage window); six BNY Mellon collective trusts were added in 2016 via a prudent process.
- Plaintiffs (former employees Brotherston and Glancy) sued under ERISA § 502(a)(2), alleging (1) prohibited transactions (fees/revenue sharing and services benefiting Putnam) in violation of 29 U.S.C. § 1106, and (2) breaches of fiduciary duties (prudence and loyalty) in offering proprietary funds and structuring fees/rebates.
- The district court granted summary judgment to defendants on some prohibited‑transaction theories and, at mid‑trial (Rule 52(c)), entered judgment for defendants on prudence, loyalty, and disgorgement claims; plaintiffs appealed.
- The First Circuit affirmed dismissal of the § 1106(a)(1)(C) claim (fees for services were reasonable), vacated dismissal under § 1106(b)(3) (PTE 77‑3 inquiry regarding whether other dealings were no less favorable), held plaintiffs presented sufficient evidence of plan loss, and adopted a trust‑law burden‑shifting rule on causation for prudence claims; it affirmed dismissal of loyalty and certain disgorgement arguments and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §1106(a)(1)(C) prohibited transaction claim succeeds (are payments to Putnam subsidiaries "unreasonable") | Putnam charged higher fees and withheld revenue‑sharing rebates other plans received; fees therefore unreasonable | Putnam's funds traded in open market, fees were competitive; expense ratios within typical market range; comparators relied on by plaintiffs flawed | Affirmed dismissal: district court's factual finding that management fees were reasonable was not clearly erroneous |
| Whether §1106(b)(3) liability is barred by PTE 77‑3(d) (are "all other dealings" no less favorable to the Plan?) | Plan was disadvantaged because it did not receive revenue‑sharing rebates that other plans got (net harm > Putnam’s upfront recordkeeping payments) | Putnam: discretionary employer contributions and paying recordkeeping costs make Plan better off; revenue sharing often went to third‑party recordkeepers, not plans | Vacated dismissal and remanded: discretionary employer contributions are not relevant to PTE 77‑3(d); district court must reassess net effect of revenue sharing and administrative fees (excluding employer contributions) |
| Whether plaintiffs proved loss from imprudent process and who bears burden on causation | Plaintiffs’ expert quantified losses by comparing Putnam actively managed funds to passive benchmarks (Vanguard indices/BNY Mellon CITs) — ~$44–46M in present‑value damages | Putnam argued comparators and methodology were improper and that some funds (e.g., QDIAs) were prudently selected; district court required plaintiffs to prove causation as part of loss | Vacated district court’s Rule 52(c) dismissal: evidence sufficient to show loss as matter of law; Court adopts trust‑law burden shifting — once plaintiff shows breach and loss, burden shifts to fiduciary to prove loss was not caused by breach |
| Whether Putnam breached duty of loyalty / disgorgement under §1109(a) | Plaintiff asserted self‑dealing: automatic inclusion/retention of proprietary funds and withholding of information motivated by Putnam’s self‑interest; seek disgorgement of fees | Putnam argued industry practice, exemptions, and lack of specific evidence of disloyal motive; district court found insufficient proof of improper motivation; plaintiffs waived some theories on appeal | Affirmed dismissal of duty of loyalty claim (no clear error in factual finding that evidence didn’t compel finding of disloyal motive); disgorgement claim under §1109(a) dismissed in part because plaintiffs waived argument that fees were "through use of plan assets," but disgorgement remains available if the §1106(b) claim on remand succeeds |
Key Cases Cited
- Harris Tr. & Sav. Bank v. Salomon Smith Barney, 530 U.S. 238 (2000) (ERISA’s prohibited‑transaction provisions supplement fiduciary duties)
- Pegram v. Herdrich, 530 U.S. 211 (2000) (ERISA fiduciary may wear multiple hats; duties depend on capacity in which actor is operating)
- Varity Corp. v. Howe, 516 U.S. 489 (1996) (common law trust principles guide ERISA interpretation when statute is silent)
- Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) (trust law principles inform ERISA standards of review)
- LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008) (ERISA fiduciary remedies informed by trust law doctrine on profits and losses)
- Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49 (2005) (ordinary default rule on allocation of burdens of proof)
- Tatum v. RJR Pension Inv. Comm., 761 F.3d 346 (4th Cir. 2014) (once breach and loss shown, burden shifts to fiduciary on causation)