High court asked to settle question of loss causation

The third time could be the charm for the U.S. Supreme Court to rule on the potentially explosive legal principle of loss causation that affects the management of and litigation against defined contribution plans.

On Jan. 11, Putnam Investments LLC asked the high court to settle the conflicting rulings among federal appeals courts over whether plaintiffs or defendants have the responsibility to prove losses in fiduciary breaches of the Employee Retirement Income Security Act.

Six appellate courts place the burden of proof on plaintiffs suing DC plan fiduciaries, while four appeals courts ruled the defendant sponsors must disprove any loss was linked to a fiduciary breach, said the petition in the case of Putnam Investments LLC et al. vs. Brotherston et al.

"This case offers a near-perfect opportunity to resolve a deep divide" among appeals courts, said Putnam's petition to the Supreme Court. "The continued split undermines ERISA's goal of uniformity. Nationwide uniformity is at the very heart of ERISA's purpose."

In June 2015, the Supreme Court declined to hear a loss-causation case, a month after then-U.S. Solicitor General Donald B. Verrilli Jr. recommended the court reject the petition in RJR Pension Investment Committee et al. vs. Tatum et al.

Asking the solicitor general's office for an opinion is common in high-profile ERISA cases, and the court again asked for an opinion in March 2018, following another loss-causation case petition in August 2017 for Pioneer Centres Holding Company Stock Ownership Plan et al. vs. Alerus Financial.

However, the court did not receive a response. In September 2018, the parties settled their differences and the Supreme Court dismissed the petition.

The Putnam case already has attracted considerable attention from interest groups, which filed amicus briefs as the case worked its way from U.S. District Court in Boston to a federal appeals court.

Putnam Investments was sued in November 2015 by participants in the company's 401(k) plan. They alleged Putnam favored proprietary products in the plan's investment menu without adequately considering cheaper, similar alternatives.

"This issue is very important to plan sponsors," Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, said in an interview, adding that her organization will file an amicus brief with the Supreme Court.

"Loss causation is an important element of an ERISA claim for breach of fiduciary duty, and shifting the burden to the plan's fiduciary to disprove loss causation would expose plans to more litigation expenses and discourage employers from sponsoring plans in the first place," Ms. Jacobson said.

"Plan sponsors should not have to guarantee optimal 401(k) investment performance or offer only a particular class of investment options — index funds — in order to avoid litigation risk," she added.

The American Benefits Council collaborated with the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association in filing an amicus brief when the case came before the appeals court. Representatives of the chamber and SIFMA said they had no comments beyond what was in the amicus brief.

AARP, the AARP Foundation and the National Employment Lawyers Association joined in filing an amicus brief supporting the participants.

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 appealed to the 1st U.S. Circuit Court of Appeals. A three-judge panel ruled unanimously that although it agreed with some of Mr. Young's thinking, it sent the case back to him on Oct. 15, 2018, to examine 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 appeals court 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 that appellate court's ruling, Putnam asked that the case be placed on hold while it petitioned the Supreme Court to settle the loss-causation debate. The appeals court agreed on Oct. 29, giving Putnam 90 days to file its petition.

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.

Would 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 asked.

The Putnam Retirement Plan had $732 million in assets as of Dec. 31, 2017, according to its latest Form 5500 filing.