A (Short) Tale of Two Class Actions

By Nevin Adams • December 15, 2016 • 0 Comments
A federal judge granted class action status in two very different lawsuits Dec. 14, though both involved challenges to actions regarding 401(k) plan investments.

The first of the lawsuits, Brotherston v. Putnam Investments, LLC (D. Mass., No. 1:15-cv-13825, electronic notice of order granting class certification 12/8/16), was brought a little more than a year ago 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 suit also claimed that that action “costs Plan participants millions of dollars in excess fees every year,” going on to claim that in 2013 “the Plan’s total expenses were 66% higher than the average retirement plan, with between $500 million and $1 billion in assets (the Plan had $589 million in assets as of the end of 2013), costing Plan participants at least $1.72 million in excess fees in 2013 alone.” The suit also claimed that the plan fiduciaries “have failed to remove poorly performing investments from the Plan, in breach of their fiduciary duties,” and “have no process for selecting mutual funds for the Plan, indiscriminately adding every mutual fund that Putnam offers into the Plan.”

The second suit, Ellis v. Fidelity Mgmt. Tr. Co. (D. Mass., No. 1:15-cv-14128, electronic notice of order granting class certification 12/8/16), involved charges by participants in the Barnes & Noble plan that invested in Fidelity’s stable value fund (and other participants who invested in that fund. The suit alleges that Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP) “had such low investment returns and high fees that it was an imprudent retirement investment.”

The suit claims that prior to 2009 Fidelity engaged in an imprudent investment strategy for the MIP “that caused substantial losses to the fund and accordingly exposed itself and the MIP’s ‘wrap providers’ to substantial losses.” The plaintiffs further allege that, “faced with a substantial decline in the MIP’s market value, and with resulting pressure from the wrap providers — which were exposed to liability in the event of significant MIP fund withdrawals — Fidelity responded by adopting an unduly conservative investment strategy that was contrary to the purposes of stable value fund investing, agreeing to allow the wrap providers to charge excessive fees, and charging excessive fees for its own account,” further claiming that Fidelity did so to protect its own position vis a vis the wrap providers to the detriment of the investors in the MIP.

Oh, and they also allege that Fidelity charged excessive fees for its own account, and that, “exacerbating its fiduciary breach, Fidelity also attempted to conceal its improperly conservative investment and excessive fees from investors by solely reporting to investors an inappropriate “money market” benchmark for the MIP — rather than a proper stable value fund benchmark (as it had used at least to some extent in years past) — that made the MIP returns appear to be competitive, when in fact, they were extremely poor.”

Both class certification orders followed hearings before Judge William G. Young of the U.S. District Court for the District of Massachusetts. Like his previous joint order refusing to dismiss either case, Young’s class certification orders didn’t include a written explanation for the decision, according to BloombergBNA.