The U.S. Supreme Court has been asked to rule on a crucial legal principle — loss causation — that has caused a split among federal appeals courts and will have a profound impact on the management of defined contribution plans.
The court has been requested to determine, when there is a breach of fiduciary duty in ERISA lawsuits, whether the plaintiff-participants must prove that alleged losses were due to the fiduciary breach or whether defendant-sponsors must disprove that the alleged loss was caused by the breach.
The request was filed Jan. 11 by Putnam Investments, which was sued in November 2015 by participants in a Putnam 401(k) plan, accusing plan fiduciaries of favoring proprietary investment options without conducting a sufficient review of all options.
"This case offers a near-perfect opportunity to resolve a deep divide," said Putnam's petition in the case of Putnam Investments LLC et al. vs. Brotherston et al.
"Nearly every regional circuit court has now weighed in, and their holdings are diametrically opposed," the petition said. Six appeals courts place the burden on plaintiffs, while four place the responsibility on the defendants.
"The continued split undermines ERISA's goal of uniformity," the petition said. "Nationwide uniformity is at the very heart of ERISA's purpose."
Initially, Boston-based U.S. District Judge William Young in March 2017 dismissed two of five claims against Putnam. After a bench trial, Mr. Young ruled in June 2017 for Putnam on the other complaints, saying participants failed to prove alleged losses were caused by a fiduciary breach.
The participants, who are seeking class-action status, appealed to the 1st U.S. Circuit Court of Appeals in Boston. A three-judge panel ruled unanimously that although it agreed with some of the District Court judge's decision, it sent the case back to him on Oct. 15, 2018, to examine the key issue of loss causation.
"Our sister courts are split on who bears the burden of proving or disproving causation once a plaintiff has proven a loss in the wake of an imprudent investment decision," the judges wrote. "We join those circuits that approve a burden-shifting approach" to defendants.
The appeals court also said: "None of this means, we add, that defendants have violated any duties or obligations owed to the plan or its beneficiaries. Rather, it simply means that we have rejected two reasons for concluding that such a violation necessarily did not occur, and we have otherwise clarified for the district court several principles that should guide its subsequent rulings in this case."
Soon after the appeals court's ruling, Putnam asked that case be placed on hold while it petitioned the Supreme Court to settle the debate over loss causation. The appeals court agreed on Oct. 29, giving Putnam 90 days to file its petition.
In addition to seeking a decision on loss causation, Putnam also asked the Supreme Court to rule on the role of actively managed investments vs. passive investments as cited in the Boston appeals court decision.
Were certain investment options that "did not perform as well as a set of index funds, selected by the plaintiffs with the benefit of hindsight, suffice as a matter of law to establish 'losses to the plan,'" the Putnam petition said.
The Putnam Retirement Plan had assets of $731.9 million as of Dec. 31, 2017, according to the latest Form 5500 filing.