“Fiduciaries that manage employer-sponsored benefits plans will likely get sued no matter what they do.” Thus begins a request from a number of retirement industry groups – including the American Retirement Association – that the U.S. Supreme Court weigh in on a controversial fiduciary case.
Said another way, the filing notes that “when the options within those plans go south—or don’t go north as quickly as a plaintiff’s lawyer would prefer—it is easy (and often lucrative) to claim that it is the fiduciaries’ fault: offering different investment options, plaintiffs claim with the benefit of hindsight, would have led to fewer losses or more sizeable returns.”
The Suit
The suit, Brotherston v. Putnam Investments, LLC, was filed in 2017 by participants in the Putnam Investments plan who alleged that the defendants “loaded the Plan exclusively with Putnam’s mutual funds, without investigating whether Plan participants would be better served by investments managed by unaffiliated companies.”
That case – which alleged many of the same arguments that have been made in excessive fee/proprietary fund suits – was dismissed in June 2017, only to be revived last October when the appellate court opted to “…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.”
The Split
Aside from the split in district courts as to where that burden of proof lay – four circuits (the First, Fourth, Fifth and Eighth Circuits) have ruled that an ERISA defendant bears the burden of proof on loss causation, while the Second, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits have left that burden on those bringing suit – in acknowledging that the First Circuit was shifting the burden, 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.”
The Case
Joining the ARA in petitioning the nation’s high court to consider the matter, and taking the side of the Putnam defendants, were the U.S. Chamber of Commerce, the American Benefits Council, SIFMA, the ERISA Industry Committee, the National Association of Manufacturers, and the Business Roundtable. The brief noted that courts are “reluctant to grant motions to dismiss or motions for summary judgment in what they see (rightly or wrongly) as technical, fact intensive cases,” and that beyond that the costs of defending themselves are “so high that the game is often not worth the candle, no matter how strong the fiduciaries’ defense on the merits.”
Ultimately, the brief points out that the Brotherston decision will “make a bad situation worse,” that “loss and loss causation are essential elements of a claim arising from a fiduciary’s alleged breach of duty,” and that as such they remain two of the chief bulwarks for stemming the tide of “meritless ERISA litigation.”
Instead, the parties argue that the First Circuit’s ruling “allows plaintiffs to establish a prima facie case of loss simply by showing, with benefit of hindsight, that the plan’s chosen investments did not perform as well as the plaintiff’s handpicked comparators over the plaintiff’s handpicked timeframe; and it requires defendants to prove that their alleged breaches did not cause those self-identified harms…” and that the elimination of these elements “will harm plan sponsors, plan fiduciaries, and plan beneficiaries” by increasing the “costs of 401(k) litigation generally, leading to fewer 401(k) plans and less generous terms.”
Moreover, the brief explains that “by allowing plaintiffs to plead loss as a matter of law by comparing actively managed to passively managed funds, it will inevitably lead fiduciaries to prefer passive investment vehicles, reducing plan participants’ choices and potentially generating smaller returns.”
Other Briefs
Separate briefs in support of the Supreme Court review were also filed by the Investment Company Institute (ICI) and the American Council of Life Insurers (ACLI). The ICI’s brief noted that the First Circuit ruling “will inevitably adversely skew fiduciaries’ selection decisions,” and that the ruling “…gives fiduciaries greater—and potentially overwhelming—incentives to make choices driven by the threat of litigation based on a single point of reference (i.e., index funds), rather than simply by what plan participants’ best interests dictate.”
Moreover, the ICI brief echoed the comments in the ARA-supported brief that “allowing plaintiffs in ERISA fiduciary breach cases to meet the loss causation element of a fiduciary breach claim solely by comparison to an index-fund-only hypothetical ignores the differences between actively managed investments and index funds,” while “assuming that, as a per se matter, a prudent fiduciary would necessarily substitute passively managed funds for active ones no matter the circumstances.”
The ACLI’s brief affirmed that meritless fiduciary breach lawsuits are on the rise, and that since these claims are “relatively easy for plaintiffs to allege” with the benefit of hindsight, it’s critical that courts require plaintiffs to prove that the conduct they challenge caused them losses.
The case is Putnam Inv., LLC v. Brotherston, U.S., No. 18-926, amicus briefs 2/15/19.
Stay tuned.
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