Brotherston v. Putnam Investments

United States Court of Appeals
For the First Circuit
No. 17-1711
JOHN BROTHERSTON, individually and as representative of a class
of similarly situated persons, and on behalf of the Putnam
Retirement Plan; JOAN GLANCY, individually and as representative
of a class of similarly situated persons, and on behalf of the
Putnam Retirement Plan,
Plaintiffs, Appellants,
v.
PUTNAM INVESTMENTS, LLC; PUTNAM BENEFITS OVERSIGHT COMMITTEE;
PUTNAM BENEFITS INVESTMENT COMMITTEE; ROBERT REYNOLDS; PUTNAM
INVESTMENT MANAGEMENT LLC; PUTNAM INVESTOR SERVICES, INC.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Torruella, Thompson, and Kayatta,
Circuit Judges.
James H. Kaster, with whom Nichols Kaster, PLLP, Paul J.
Lukas, Kai H. Richter, Carl F. Engstrom, Jacob T. Schutz, and
Eleanor E. Frisch were on brief, for appellants.
Mary Ellen Signorille, William Alvarado Rivera, and Matt
Koski, on brief for amici curiae AARP, AARP Foundation, and
National Employment Lawyers Association.
James R. Carroll, with whom Eben P. Colby, Michael S. Hines,
Sarah L. Rosenbluth, and Skadden, Arps, Slate, Meagher & Flom LLP
were on brief, for appellees.
William M. Jay, Jaime A. Santos, James O. Fleckner, Alison V.
Douglass, Goodwin Procter LLP, Steven P. Lehotsky, Janet Galeria,
Kevin Carroll, and Janet M. Jacobson, on brief for amici curiae
Chamber of Commerce of the United States of America, American
Benefits Council, and Securities Industry and Financial Markets
Association.
Sarah M. Adams, Jon W. Breyfogle, Michael J. Prame, Groom Law
Group, Chartered, Paul S. Stevens, Susan M. Olson, David M. Abbey,
on brief for amicus curiae Investment Company Institute.
October 15, 2018
KAYATTA, Circuit Judge. Plaintiffs John Brotherston and
Joan Glancy are two former employees of Putnam Investments, LLC
who participated in Putnam's defined-contribution 401(k)
retirement plan (the "Plan"). They brought this lawsuit on behalf
of a now-certified class of other participants in the Plan, and on
behalf of the Plan itself pursuant to the civil enforcement
provision of the Employee Retirement Income Security Act
("ERISA"). See 29 U.S.C. § 1132(a)(2). They claim that Putnam
(as well as other Plan fiduciaries) breached fiduciary duties owed
to Plan participants by offering participants a range of mutual
fund investments that included all of (and, for most of the class
period, only) Putnam's own mutual funds without regard to whether
such funds were prudent investment options. They also claim that
Putnam structured fees and rebates in a manner that was both
unreasonable and treated Plan participants worse than other
investors in those Putnam mutual funds. In a series of rulings
before and after plaintiffs presented their evidence at trial, the
district court found that plaintiffs failed to prove that any lack
of care in selecting the Plan's investment options resulted in a
loss to the Plan, and that the manner in which Putnam transacted
with the Plan was neither unreasonable nor less advantageous than
the manner in which Putnam dealt with other investors in its mutual
funds. Finding several errors of law in the district court's
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rulings, we vacate the district court's judgment in part and remand
for further proceedings.
I.
We begin with a basic outline of the undisputed facts
and the procedural history of this case, reserving further details
for our analysis.1 Putnam is an asset management company that
creates, manages, and sells mutual funds. Under the Plan, eligible
employees of Putnam and its subsidiaries make contributions to
individual 401(k) accounts and personally direct those
contributions among a menu of investment options. Putnam itself
also contributes to the employees' Plan accounts. Pursuant to the
Plan's governing documents, Putnam Benefits Investment Committee
("PBIC") is one of the Plan's named fiduciaries and is responsible
for selecting, monitoring, and removing investments from the
Plan's offerings.
The investment options offered under the Plan include
many of Putnam's proprietary mutual funds. Between 2009 and 2015,
over 85% of the Plan's assets were invested in these funds. Putnam
offers two classes of shares in these funds: Y shares and R6
shares.2 Most of Putnam's mutual funds offered under the Plan are
1We rely on facts to which the parties have stipulated and
the district court's factual findings from the two orders now on
appeal.
2One of the claims advanced below but abandoned on appeal
involved Putnam's conversion of Y shares for certain Putnam funds
to R6 shares. For our purposes, the distinction between these two
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"actively managed"; that is, they are operated by an investment
advisor seeking to beat the market. From the beginning of the
class period in November 2009 through January 31, 2016, the PBIC
selected no mutual funds other than the propriety Putnam funds for
inclusion in the portfolio of investment vehicles offered to Plan
participants. During this period, Plan participants were given
the option to invest in non-affiliated funds only through a self-
directed brokerage account.
The Plan itself did instruct the PBIC to include as
investment options "any publicly offered, open-end mutual fund
(other than tax-exempt funds) that are generally made available to
employer-sponsored retirement plans and underwritten or managed by
Putnam Investments or one of its affiliates," as well as several
other Putnam funds and a collective investment trust administered
by Putnam's affiliate, PanAgora Asset Management, Inc. But the
parties presume, at least for purposes of this case, that this
instruction does not immunize defendants from potential liability
based on the duty of prudence in selecting investment offerings
under the Plan. See Fifth Third Bancorp v. Dudenhoeffer, 134 S.
Ct. 2459, 2468 (2014) ("[T]he duty of prudence trumps the
instructions of a plan document . . . .").
share classes is relevant only to our discussion of revenue sharing
in Part II.B., infra.
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The district court found that the PBIC did not
independently investigate Putnam funds before including them as
investment options under the Plan, did not independently monitor
them once in the Plan,3 and did not remove a single fund from the
Plan lineup for underperformance, even when certain Putnam funds
received a "fail" rating from Advised Asset Group, a Putnam
affiliate.4
In November 2015, Brotherston and Glancy filed this
lawsuit against Putnam, the PBIC, and various other Putnam
individuals and entities (collectively, "defendants"). On behalf
of themselves, two certified subclasses of other Plan
participants, and the Plan itself pursuant to 29 U.S.C.
§ 1132(a)(2) (collectively, "plaintiffs"), they press two types of
claims under ERISA. First, they claim that the fees charged by
Putnam subsidiaries to the mutual funds offered in the Plan
constituted prohibited transactions under ERISA. Second, they
claim that Putnam, through its committees operating the Plan,
breached its fiduciary duties by blindly stocking the Plan with
Putnam-affiliated investment options merely because they were
3 As defendants emphasized before the district court, members
of Putnam's investment division, some of whom served on the PBIC,
did engage in regular monitoring of the Putnam funds. But the
PBIC itself did not independently monitor the investments, instead
relying on the expertise and analysis of the investment division.
4 The Putnam Voyager Fund was removed from the Plan lineup
but only after the fund was closed.
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proprietary.5 Three months after this lawsuit commenced, the PBIC
added six BNY Mellon collective investment trusts to the Plan's
investment options. It is undisputed that the process for choosing
the BNY Mellon funds was prudent.
By agreement of the parties, the district court decided
plaintiffs' prohibited transactions claims on a case-stated basis
at summary judgment. After seven days of a bench trial, during
which plaintiffs but not defendants presented their case, the
district court entered judgment on partial findings under Federal
Rule of Civil Procedure 52(c). On all counts, the court found
against plaintiffs, who now appeal.
II.
We begin our analysis with the order that dismissed
plaintiffs' prohibited transactions claims. The case-stated
procedure allows a court in a nonjury case to "engage in a certain
amount of factfinding, including the drawing of inferences," where
"the basic dispute between the parties concerns only the factual
inferences that one might draw from the more basic facts to which
the parties have agreed." Pac. Indem. Co. v. Deming, 828 F.3d 19,
5 Plaintiffs also asserted a claim against Putnam, its CEO,
and the Putnam Benefits Oversight Committee for failing to monitor
the performance of the PBIC. We, like the district court, treat
this claim as subsumed within plaintiffs' fiduciary duty claims,
as other courts have done. See Tracey v. Mass. Inst. of Tech.,
No. 16-cv-11620-NMG, 2017 WL 4478239, at *4 (D. Mass. Oct. 4,
2017); In re Nokia ERISA Litigation, No. 10-cv-03306-GBD, 2012 WL
4056076, at *3 (S.D.N.Y. Sept. 13, 2012).
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22 (1st Cir. 2016) (quoting United Paperworkers Int'l Union Local
14 v. Int'l Paper Co., 64 F.3d 28, 31–32 (1st Cir. 1995)). In
reviewing the entry of summary judgment on a case-stated record,
we review legal questions de novo and factual determinations for
clear error. See United Paperworkers Int'l, 64 F.3d at 31–32.
A brief sketch of the statutory background frames our
analysis. ERISA "supplements the fiduciary's general duty of
loyalty to the plan's beneficiaries by categorically barring
certain transactions deemed 'likely to injure the pension plan.'"
Harris Tr. and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S.
238, 241–42 (2000) (citation omitted) (quoting Comm'r v. Keystone
Consol. Indus., Inc., 508 U.S. 152, 160 (1993)). Two particular
prohibitions, and their related exemptions, are at issue here.6
The first prohibition appears in section 1106(a)(1), which states:
Except as provided in section 1108 of this
title:
(1) A fiduciary with respect to a plan shall
not cause the plan to engage in a transaction,
if he knows or should know that such
transaction constitutes a direct or indirect--
. . .
(C) furnishing of goods, services, or
facilities between the plan and a party in
interest . . . .
6 In addition to the two prohibited transactions claims we
discuss, plaintiffs also asserted below claims under 29 U.S.C.
§§ 1106(a)(1)(D) and 1106(b)(1). Plaintiffs concede that they do
not challenge the dismissal of those claims by the district court.
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29 U.S.C. § 1106(a)(1)(C). The second prohibition appears in
section 1106(b), which provides:
A fiduciary with respect to a plan shall not--
. . .
(3) receive any consideration for his own
personal account from any party dealing with
such plan in connection with a transaction
involving the assets of the plan.
29 U.S.C. § 1106(b).
The design and operation of the Plan implicates both of
these prohibitions. The Plan contracts with parties-in-interest
(Putnam subsidiaries) for services, thereby implicating
section 1106(a)(1).7 And Putnam, through the service fees it
charges the Putnam funds in which the Plan invests, receives a
benefit "in connection with a transaction involving the assets of
the [P]lan" (that transaction being the Plan's purchase of shares
in the Putnam funds), thereby implicating section 1106(b). Putnam
therefore runs afoul of each prohibition unless it qualifies for
an applicable exemption. Defendants argue that several such
exemptions apply. We address each in turn, beginning with those
potentially applicable to the otherwise broad reach of the
prohibition imposed by section 1106(a)(1) for causing a plan to
purchase services from a party-in-interest.
7 The term "party in interest" includes, among other things,
any fiduciary of the employee benefit plan, and "an employer
organization any of whose members are covered by such plan." 29
U.S.C. § 1002(14). Putman subsidiaries are parties-in-interest in
both these capacities.
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A.
By its very terms, the prohibition of section 1106(a)(1)
on transactions with parties-in-interest applies "[e]xcept as
provided in section 1108." Section 1108 in turn provides two
exemptions upon which defendants rely. The first exemption allows
for:
Contracting or making reasonable arrangements
with a party in interest for office space, or
legal, accounting, or other services necessary
for the establishment or operation of the
plan, if no more than reasonable compensation
is paid therefor.
29 U.S.C. § 1108(b)(2) (emphasis added). The second exemption
provides that a fiduciary shall not be barred from:
receiving any reasonable compensation for
services rendered, or for the reimbursement of
expenses properly and actually incurred, in
the performance of his duties with the plan;
except that no person so serving who already
receives full time pay from an employer or an
association of employers, whose employees are
participants in the plan, or from an employee
organization whose members are participants in
such plan shall receive compensation from such
plan, except for reimbursement of expenses
properly and actually incurred.
Id. § 1108(c)(2) (emphasis added).
Relevant here, Putnam mutual funds pay a monthly
management fee to Putnam Investment Management, LLC ("Putnam
Management") for investment management services and a monthly
investor servicing fee to Putnam Investor Services, Inc. ("Putnam
Services") for transfer agent services. Both Putnam Management
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and Putnam Services operate as part of Putnam and their profits
flow directly to the parent company. So in the context of this
case, the applicability of the two exemptions set forth in
sections 1108(b)(2) and 1108(c)(2) hinges in the first instance on
the answer to a common question: Were the payments received by
these Putnam subsidiaries for their services to Putnam mutual funds
reasonable?
The district court made several findings on this
question based on the case-stated record. First, it found that
the net expense ratios for the funds in which the Plan invested
ranged from 0% to 1.65% as of December 2011, and that there was no
evidence that the range was materially different for the relevant
class period. Brotherston v. Putnam Invs., LLC, 15-cv-13825-WGY,
2017 WL 1196648, at *6 (D. Mass. Mar. 30, 2017) Relatedly, the
district court noted that other courts have upheld similar ranges.
Id. Second, the court observed that, "[i]mportantly, all of the
Putnam mutual funds the Plan invested in were also offered to
investors in the general public, therefore, their expense ratios
were 'set against the backdrop of market competition.'" Id.
(quoting Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009)).
Finally, the court rejected the analysis of plaintiffs' expert,
Dr. Steve Pomerantz, who purported to show that Putnam's fees were
materially higher on average than the fees paid by other funds, on
the grounds that his comparators were flawed. Id. at *7.
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In context, we read the district court's second finding
as saying that the Putnam funds were both offered to and acquired
by at least some other individuals and entities who had the freedom
to invest in other funds in the marketplace. Such was precisely
what defendants' expert, Dr. Erik Sirri, said in one of his
reports.8 Sirri's supplemental report stated that, in contrast to
the conclusion drawn by plaintiffs' expert, the data "do not
indicate that Putnam's funds have generally been rejected by
impartial, unaffiliated fiduciaries of non-Putnam retirement
plans." Rather, the report noted, "all but nine of the funds were
offered by at least one other plan and several funds were offered
by over one hundred different plans. Two-thirds of the funds were
offered by at least nine other plans, and half were offered by at
least 23 other plans."9 In addition, Sirri concluded in his
original report that the Plan paid about $500,000 less in expenses
from 2009 to 2014 than it would have paid had it invested at the
8 Although plaintiffs contended below that Sirri's full
reports were not properly before the district court, they
acknowledge Sirri's analysis in their Reply on appeal without
making any suggestion that it would be improper for us to rely
upon it.
9 While these numbers might strike one as very small given
the large number of ERISA plans in the United States, plaintiffs
make no argument on appeal to this effect. Nor do they argue that
we should train our focus on, or draw any particular inferences
from, the nine funds that were not offered by any other plan.
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average expense ratio for peer group funds identified by
independent analyst Lipper, Inc.
Plaintiffs' position, supported by Pomerantz's report,
was that very few plans as large as the Plan invested in any of
the Putnam funds. And, as we noted, Pomerantz put forward an
analysis to the effect that Putnam charged more for its funds than
did other funds the expert deemed comparable. Based on this
testimony, perhaps the district court could have found the fees
unreasonable even though other investors paid them. But our review
of the district court's finding to the contrary is for clear error.
See United Paperworkers Int'l, 64 F.3d at 31–32; see also Chao v.
Hotel Oasis, Inc., 493 F.3d 26, 35 (1st Cir. 2007) (noting in
another context that we review "factual findings related to good
faith and reasonableness for clear error"). And on this record we
see no clear error in that finding. Moreover, the fact that the
district court did not explicitly frame its conclusion that Putnam
charges reasonable management fees as what it plainly was -- a
finding of fact -- does not preclude us from treating it as such.
Plaintiffs also complain that Putnam did not offer the
Plan the same revenue sharing rebates it offered other plans. And
they contend that Sirri's analysis failed to account for this fact.
But plaintiffs do not develop this argument in connection with
their section 1106(a)(1) claim, the exemption that calls for an
analysis of precisely why a fee is not "reasonable." So, we will
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review the revenue sharing rebates only as part of the inquiry
into "other dealings" relevant to the exemption from the
prohibition of section 1106(b).
We therefore affirm the district court's determination
that defendants are not liable under the prohibited transaction
provision of section 1106(a)(1)(C).
B.
Next, we ask whether defendants are liable under
section 1106(b) because Putnam received fees from the funds in
which the Plan invested. To avoid liability under that provision,
defendants seek to rely on a prohibited transaction exemption
adopted by the Department of Labor. Known as PTE 77-3, the
exemption renders the prohibition of section 1106 inapplicable to
employee benefit plans that invest in in-house mutual funds,
provided that four conditions are met. See 42 F.R. 18734; see
also Krueger v. Ameriprise Fin., Inc., No. 11-cv-02781-SRN/JSM,
2012 WL 5873825, at *14 (D. Minn. Nov. 20, 2012). Plaintiffs
challenge only the satisfaction of one of these conditions. We
therefore limit our analysis to that condition, which reads as
follows:
[a]ll other dealings between the plan and the
investment company, the investment adviser or
principal underwriter for the investment
company, or any affiliated person of such
investment adviser or principal underwriter,
are on a basis no less favorable to the plan
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than such dealings are with other shareholders
of the investment company.
42 F.R. 18734, 18735. So the question for the district court was:
Are "[a]ll other dealings" between the Plan and Putnam any less
favorable to the Plan than dealings between Putnam and other
shareholders investing in the same Putnam funds?
The dealings upon which the parties focus are payments
of service fees and revenue sharing that Putnam provides for the
benefit of plans that invest in its funds. When a third-party
plan (i.e., a plan other than the Putnam Plan) invests in Y shares
of a typical Putnam mutual fund, the third-party plan pays fees to
a company that provides certain services to the plan, such as
recordkeeping. In many instances, the manager of the Putnam mutual
fund in which the plan invests pays the recordkeeper a share of
the fund's revenue to reimburse the recordkeeper for services the
manager would otherwise have to provide or pay for. The
recordkeeper in turn may credit this payment to the plan. And
sometimes the investment manager provides the revenue sharing
directly to the plan.
With the Putnam Plan, the arrangement differs. Putnam
itself directly pays the recordkeeper for the Plan, the
recordkeeper does not charge any fees to the Plan, and Putnam's
investment managers pay no revenue sharing to or for the benefit
of the Plan, even in relation to Y shares of Putnam mutual funds.
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Plaintiffs claim that this alternative arrangement
operated to the Plan's disadvantage because it resulted in Plan
participants paying higher expenses compared to third-party plan
participants who benefitted from revenue-sharing rebates. This
theory only works if the value of the revenue sharing that third-
party plans receive exceeds the value of the service fees borne by
those plans. Otherwise, third-party plans are simply being
compensated for costs that the Plan never bears in the first place,
which puts the Plan no worse off on net.
The district court did not find whether or to what extent
the revenue sharing paid to or for the benefit of some third-party
plans would have exceeded the fees borne by third-party plans but
not by the Plan. Instead, at defendants' behest, the district
court pointed to the fact that Putnam paid into the Plan (for the
benefit of most participants) discretionary 401(k) employer
contributions that totaled much more than the rebates would have.
Pointing to the fact that PTE 77-3 calls for an assessment of
"[a]ll other dealings between the plan and the investment company,"
the district court reasoned that, on a net basis, Putnam treated
its Plan even more favorably than it treated those that received
the benefit of revenue-sharing payments.
We do not agree with this analysis because we do not
regard Putnam's payment of discretionary contributions to be a
relevant "dealing" between Putnam and the Plan. As noted, PTE 77-
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3, which directs our focus to "all other dealings," is an exemption
to section 1106(b), which otherwise prohibits "[a] fiduciary" from
receiving payment or other consideration in connection with its
own plan. As the Supreme Court has recognized, "the trustee under
ERISA may wear many different hats." Pegram v. Herdrich, 530 U.S.
211, 225 (2000). Putnam wore at least two hats: that of an
employer dealing with its employees and that of a fiduciary dealing
with the Plan. In making discretionary contributions, it acted as
employer providing compensation to its employees, not as
fiduciary. See ERISA Practice & Litigation § 3:32 ("In the single
employer plan context, decisions relating to the timing and amount
of contributions are generally not thought of as being fiduciary
in nature."); cf. Akers v. Palmer, 71 F.3d 226, 230 (6th Cir. 1995)
(noting that "courts have no authority to decide which benefits
employers must confer upon their employees" (quoting Moore v.
Reynolds Metals Co. Ret. Prog., 740 F.2d 454, 456 (6th Cir. 1984)).
Putnam's own documents confirm that it understood this
to be the law. Putnam's Fiduciary Planning Guide explains the
basic contours of fiduciary responsibility. Under a heading
labeled "A Fiduciary -- But Only for 'Fiduciary Functions,'" Putnam
explains that various decisions, including determining "the level
of benefits" for a retirement plan, are made in a party's "capacity
as employer" and "are not subject to, and cannot be challenged,
under ERISA's fiduciary rules."
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In other words, the term "employer contribution"
commonly used to describe the discretionary payments at issue here
is no misnomer. Because Putnam's discretionary contributions were
made in Putnam's capacity as employer for the benefit of its
employees qua employees, they are irrelevant to the analysis under
PTE 77-3, which, as we have noted, provides an exception to a
prohibition on actions by fiduciaries. Putnam cannot point to
those contributions to offset funds Putnam charges (or withholds
from) the Plan in its capacity as a plan fiduciary. To hold
otherwise would be to allow employers to claw back with their
fiduciary hands compensation granted with their employer hands.
Taking an alternative tack, defendants contend that
revenue sharing payments are not relevant to PTE 77-3(d) because
they are paid to third-party service providers, rather than to the
plans that own shares in the funds (the "shareholders" under
PTE 77-3). The record supports defendants' assertion that revenue
sharing payments are often paid directly to third-party service
providers. However, defendants do not contest that these payments
may well benefit the associated plans by offsetting payments the
plans would otherwise make to those providers. Given this
beneficial link, these payments fall within PTE 77-3's instruction
to consider dealings between the "investment company" (Putnam) and
"other shareholders" (third-party plans). Cf. NLRB v. Cabot Carbon
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Co., 360 U.S. 203, 211 (1959) (construing "dealing with" as a
"broad term").
Defendants' final rejoinder is that, for the Plan alone,
Putnam pays recordkeeping fees upfront, rather than passing those
costs along to the Plan. But, as we have already noted, this
assertion does not definitively answer whether the Plan is treated
less favorably than other shareholders. It is undisputed that the
Plan's recordkeeping expenses that Putnam pays upfront are 3 basis
points (0.03% of plan assets). It is also undisputed that Putnam
pays revenue sharing of up to 25 basis points (0.25% of fund
assets) in connection with Y shares of Putnam mutual funds held by
other plans. Given the gap between these two figures, the Plan
may in fact be missing out on net revenue sharing benefits being
recouped by other plans. Pomerantz asserted in his report that
this is precisely what has happened. According to his
calculations, which he adjusted to present value, the Plan lost
out on over $5 million from 2010 to 2016 as a result of the Plan's
inability to capture revenue sharing payments. This analysis took
into account the fact that Putnam paid recordkeeping fees and so-
called "trustee fees."
Defendants assert that in addition to paying "[a]ll
recordkeeping expenses," Putnam also pays "the cost of a service
that provides individualized investment advice to participants,"
as well as the annual fee associated with the brokerage window
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that allows Plan participants to access non-Putnam investments.
But defendants do not quantify this payment in their briefing.
Nor do they address whether the figures for "total administrative
fees" to which they stipulated below include the additional cost
of the window or the fees identified in other documents in the
record.
Without guidance from the parties on how to analyze these
various documents and without the benefit of the district court's
assessment on the matter, we think it best not to sift through the
record to reach our own unaided conclusions. We therefore vacate
the judgment against plaintiffs on their claim under
section 1106(b) and remand for the district court to reconsider
whether the requirement of PTE 77-3(d) is satisfied in light of
revenue sharing payments Putnam makes to some other plans.10 In
considering whether, by not receiving the benefit of such payments,
the Plan was treated any less favorably on net than other
comparably situated plans, the district court should consider,
among other things, the administrative fees paid by Putnam, as
well as any fees paid by the Plan itself. The district court
10
We need not address the district court's ruling that ERISA's
statute of limitations barred an "aspect of" plaintiffs' claim
under section 1106(b) -- related to Putnam's conversion of Y shares
to R6 shares, see supra n.2 -- because that ruling was limited to
issues not before us on appeal.
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should not consider the discretionary contributions made by Putnam
to Plan participants.
III.
We turn now to the district court's ruling mid-trial
dismissing plaintiffs' claims that Putnam acted imprudently in
selecting the Plan's investment options and that it breached the
duty of loyalty by engaging in self-dealing. "If a party has been
fully heard on an issue during a nonjury trial and the court finds
against the party on that issue," Rule 52(c) allows the court to
"enter judgment against the party on a claim or defense that, under
the controlling law, can be maintained or defeated only with a
favorable finding on that issue." Fed. R. Civ. P. 52(c); see also
Morales Feliciano v. Rullán, 378 F.3d 42, 59 (1st Cir. 2004). In
resolving a Rule 52(c) motion, "the court's task is to weigh the
evidence, resolve any conflicts in it, and decide for itself in
which party's favor the preponderance of the evidence lies."
9C Charles Alan Wright & Arthur R. Miller, Federal Practice &
Procedure § 2573.1 (3d ed.) (footnotes omitted). As with a case-
stated summary judgment ruling, we review Rule 52(c) judgments
under a mixed standard of review, "evaluat[ing] the district
court's conclusions of law de novo and typically examin[ing] the
district court's underlying findings of fact for clear error."
Mullin v. Town of Fairhaven, 284 F.3d 31, 36–37 (1st Cir. 2002)
(internal quotation marks and citations omitted).
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A.
We begin with the duty of prudence. Pursuant to ERISA,
a fiduciary must act "with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting
in a like capacity and familiar with such matters would use." 29
U.S.C. § 1104(a)(1)(B). A fiduciary who breaches that duty must
"make good" to the plan "any losses to the plan resulting from
such breach." Id. § 1109(a). Although the parties in this case
dispute the precise requirements for making out a duty of prudence
claim, both sides agree that the claim has three elements: breach,
loss, and causation. We address each in turn.
1.
The district court fairly summarized the plaintiffs'
theory of breach: "[T]he Defendants violated their fiduciary duty
of prudence by failing to implement or follow a prudent objective
process for investigating and monitoring the individual merits of
each of the Plan's investments in terms of costs, redundancy, or
performance." Brotherston v. Putnam Invs., LLC, No. 15-cv-13825-
WGY, 2017 WL 2634361, at *8 (D. Mass. June 19, 2017). Because the
district court terminated the trial before Putnam could present
its defense, the district court did not make a definitive ruling
on whether such a violation occurred. Rather, it concluded that
the evidence presented would be sufficient to support a finding
that the PBIC "failed to monitor the Plan investments
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independently" and that it therefore failed to discharge its
fiduciary duty. Id. at *9. Presumably because of the tentative
nature of the district court's conclusion, Putnam lodges no cross-
appeal from that determination, so we accept it at face value and
move on to the question of loss.
2.
The question of loss in this case might at first blush
seem quite simple. If one invests $1,000 in shares of a mutual
fund, and two years later the shares are worth $1,000, many people
would say that there has been no loss. Certainly the IRS agrees.
And if the investment increases in absolute dollar value, rather
than remaining constant, many would similarly claim no loss.
Any reasonably sophisticated investor, though, would
think about loss -- and gain -- very differently. To the extent
that the investor had a choice of investments, the decision to
pick one investment over another might result in a measurable loss
of opportunity. It follows that a trustee who decides to stuff
cash in a mattress cannot assure that there is no loss merely by
holding onto the mattress. This more sophisticated view of loss
aligns with most people's expectations regarding their financial
fiduciaries who have broad investment discretion. It also aligns
with what has become known as the "total return" measure of loss
and damages for breach of trust. See Restatement (Third) of
Trusts, § 100 cmt. a(3); see also id. § 100 cmt. b(1).
- 23 -
The Restatement calls "for determining whether and in
what amount the breach has caused a 'loss[]' . . . by reference to
what the results 'would have been if the portion of the trust
affected by the breach had been properly administered.'" Id.
ch. 19, intro. note (emphasis in original) (quoting Id. § 100).
The Restatement expands on this principle as follows: The recovery
from a trustee for imprudent or otherwise improper investments is
ordinarily "the difference between (1) the value of those
investments and their income and other product at the time of
surcharge and (2) the amount of funds expended in making the
improper investments, increased (or decreased) by a projected
amount of total return (or negative total return) that would have
accrued to the trust and its beneficiaries if the funds had been
properly invested." Id. § 100 cmt. b(1). Finally, the Restatement
specifically identifies as an appropriate comparator for loss
calculation purposes "return rates of one or more . . . suitable
index mutual funds or market indexes (with such adjustments as may
be appropriate)." Id.
ERISA itself is not so specific. Rather, it states that
a breaching fiduciary shall be liable to the plan for "any losses
to the plan resulting from each such breach." 29 U.S.C. § 1109(a).
Certainly this text is broad enough to accommodate the total return
principle recognized in the Restatement. Behind the text, too,
stands Congress's clear intent "to provide the courts with broad
- 24 -
remedies for redressing the interests of participants and
beneficiaries when they have been adversely affected by breaches
of fiduciary duty." Eaves v. Penn, 587 F.2d 453, 462 (10th Cir.
1978) (relying on S. Rep. No. 93-127). And as the Supreme Court
has instructed, when we confront a lack of explicit direction in
the text of ERISA, we often find answers in the common law of
trusts. See Varity Corp. v. Howe, 516 U.S. 489, 496-97 (1996);
see also id. at 502, 506-07 (relying on "ordinary trust law
principles" to fill gaps created by ERISA's lack of definition
regarding the scope of fiduciary conduct and duties).
In this instance, the trust law that we have described
provides an answer that both requires no stretch of ERISA's text
and accords with common sense. Otherwise, hoarding plan assets in
cash would become a fail-safe option for ERISA fiduciaries. We
therefore hold that an ERISA trustee that imprudently performs its
discretionary investment decisions, including the design of a
portfolio of funds to offer as investment options in a defined-
contribution plan, "is chargeable with . . . the amount required
to restore the values of the trust estate and trust distributions
to what they would have been if the portion of the trust affected
by the breach had been properly administered." Restatement (Third)
of Trusts, § 100.
Applying this definition of chargeable loss to the case
at hand, we begin with the district court's tentative finding that
- 25 -
PBIC breached its fiduciary duty in automatically including Putnam
funds as investment options for the Plan and then failing to
independently monitor the performance of those funds. The district
court correctly observed that such a breach does not mean that the
Plan necessarily suffered any loss. So the question was, did any
loss occur?
Plaintiffs attempted to answer this question with the
testimony of their expert, Pomerantz. As we have noted, most of
the Putnam funds were actively managed and therefore carried higher
fees than passively-managed funds. For each Putnam fund held by
the Plan, Pomerantz asked whether the Plan got something for those
higher fees. Pomerantz began by comparing one at a time the total
return for each Putnam fund to the total return for two passive
comparators, a Vanguard index fund that belonged to the same
Morningstar category11 as the Putnam fund and a BNY Mellon
collective investment trust, for every quarter from the beginning
of the class period through mid-2016, and then adding together
each quarterly differential. Pomerantz also did a second analysis
with the same comparators, focusing on the fees charged by the
Putnam fund compared to the comparator fund, to be able to pinpoint
what portion of the difference in total returns stemmed from the
11Morningstar is "an independent provider of investment news
and research." SEC v. Bauer, 723 F.3d 758, 774 (7th Cir. 2013);
see also United States v. Stinson, 734 F.3d 180, 182 (3d Cir.
2013); Krull v. SEC, 248 F.3d 907, 909 n.2 (9th Cir. 2001).
- 26 -
fee differential. Where an automatically-included Putnam fund
generated returns equal to or greater than its benchmark, Pomerantz
calculated no loss for that fund, and credited any differential
gain to Putnam. But where an automatically-included Putnam fund
generated lower returns than its benchmark, he deemed the
differential to be a loss. Pomerantz testified that overall, the
portfolio of actively managed Putnam funds, when compared to a
portfolio of passively managed Vanguard funds, suffered total
damages (converted to present value) of about $45.6 million. Most
of this figure, about $31.7 million, was attributable to the
difference in fees between the two sets of funds. When compared
to a portfolio of BNY Mellon funds, the Putnam portfolio suffered
total damages of about $44.3 million, of which about $35.1 was fee
damage. In short, according to Pomerantz's testimony, the Plan
and its beneficiaries paid a premium of $30 to $35 million to
obtain overall net returns that fell below the returns generated
by the passive investment options that the PBIC could have offered.
The district court ruled, as a matter of law, this
evidence was insufficient to make out a prima facie case of loss.
It is not clear why the district court so concluded. The court
stated at one point that proof that Putnam lacked a prudent process
to monitor Plan investment vehicles did not make "the entire Plan
lineup imprudent." Brotherston, 2017 WL 2634361, at *12. It
further stated that "a person could lack an independent process to
- 27 -
monitor his investment and still end up with prudent investments,
even if it was the result of sheer luck." Id. In so stating, the
district court appeared concerned that approving what it
characterized as the "broad sweep of the Plaintiffs' 'procedural
breach' theory," id. at *10, would implicitly decide, without proof
on the matter, that every fund in the Plan's portfolio was "per se
imprudent," id. at *12, in the sense of being substantively an
unwise investment. But nothing in Pomerantz's methodology so
presumed. Rather, he simply calculated which funds generated a
loss relative to a benchmark.
Of course, the court's concern regarding holding
defendants liable for losses stemming from funds that may in fact
be good investment options even if selected without due care is
legitimate; ERISA defendants are not liable for damages that the
Plan would have suffered even with a prudent fiduciary at the helm.
See Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 919 (8th Cir.
1994) ("Even if a trustee failed to conduct an investigation before
making a decision, he is insulated from liability if a hypothetical
prudent fiduciary would have made the same decision anyway.").
But this is an issue of causation (and possibly damage
calculation), not loss. See id. (framing the question of whether
a fiduciary's decision was objectively reasonable as part of
ERISA's causation requirement). And for the reasons we explain in
the following section, the burden of showing that a loss would
- 28 -
have occurred even had the fiduciary acted prudently falls on the
imprudent fiduciary. By allowing its analysis on loss to be driven
by its concern regarding the objective prudence of the Putnam
funds, the district court in essence required plaintiffs to show
causation as part of its case on loss -- even as it correctly
sought to reserve that requirement to defendants.12 Brotherston,
2017 WL 2634361, at *9 n.15.
The district court's concern may also have been
implicitly informed by a point it summarized in its statement of
facts but did not revisit in its analysis: that Putnam included
in the Plan's investment lineup so-called qualified default
investment alternatives ("QDIAs"), also known as Putnam's
Retirement Ready funds. As the district court pointed out,
plaintiffs' "fiduciary process expert" at trial, Dr. Martin
Schmidt, testified that the process for reviewing and monitoring
these funds was prudent, although plaintiffs dispute on appeal the
precise meaning of Schmidt's testimony. The presence of prudently
managed Putnam funds in the Plan's investment menu suggests that
a portion of Pomerantz's estimate of total portfolio-wide loss may
12
Defendants assert that the district court's requirement of
a "causal link" is "not the same as requiring Plaintiffs to
definitively prove loss causation" but offer no explanation for
what this means.
- 29 -
be subject to challenge for that reason, among others.13 It does
not, however, establish that Pomerantz's approach was across-the-
board inadequate as a matter of law.
The point remains: With the exception of the QDIAs, the
entire portfolio of investment options (through January 31, 2016)
was selected by the use of imprudent means, or so the district
court itself conditionally found. So to determine whether there
was a loss, it is reasonable to compare the actual returns on that
portfolio to the returns that would have been generated by a
portfolio of benchmark funds or indexes comparable but for the
fact that they do not claim to be able to pick winners and losers,
or charge for doing so. Restatement (Third) of Trusts, § 100
cmt. b(1) (loss determinations can be based on returns of suitable
index mutual funds or market indexes); cf. Evans v. Akers, 534
F.3d 65, 74 (1st Cir. 2008) ("Losses to a plan from breaches of
the duty of prudence may be ascertained, with the help of expert
analysis, by comparing the performance of the imprudent
investments with the performance of a prudently invested
portfolio."). This is what Pomerantz purported to do.
This is not to say that Pomerantz necessarily picked
suitable benchmarks, or calculated the returns correctly, or
focused on the correct time period. Putnam raises some of these
13 Pomerantz's reports provided to defendants break out the
loss or gain for each fund in the portfolio.
- 30 -
issues on appeal, arguing that Pomerantz's comparators were not
plausible and that he improperly focused on damages at a particular
point in time. But these are questions of fact.14 And the district
court never reached these questions precisely because it concluded
that Pomerantz's approach to establishing that the investment
funds selected by Putnam incurred losses was insufficient as a
matter of law. Correctly recognizing that its resolution of that
issue was not clear cut, the district court explicitly invited de
novo review on the question of legal sufficiency, which we have
now provided by determining that plaintiffs' evidence was
sufficient to support a finding of loss.
3.
We now turn to the question of causation. Assuming the
Plan suffered a loss, the district court was certainly correct
that the lack of prudence in the procedures used to select
investments may not have caused the loss. See Plasterers' Local
Union No. 96 Pension Plan, 663 F.3d at 218 (4th Cir. 2011) ("[T]he
mere fact that the [fiduciaries] failed to investigate alternative
investment options does not mean that their actual investments
were necessarily imprudent ones."). A prudent investor may have
14
To the extent defendants' argument on appeal that "[t]here
is simply no evidence in the record" to support Pomerantz's
selection of comparators is meant to challenge his comparators as
a matter of law, that argument fails. As explained in this
section, there is legal support for the use of index funds and
other benchmarks as comparators for loss calculation purposes.
- 31 -
selected fee-burdened funds, perhaps even Putnam's specific funds,
that over the relevant years performed worse than market index
funds for reasons that would have been reasonably unforeseeable to
or discounted by the prudent investor. Since ERISA only allows
for the recovery of loss "resulting from" the fiduciary's breach,
a beneficiary is not eligible to recover damages in that situation.
29 U.S.C. § 1109(a). All of this means that a court need find
causation before awarding damages. See Roth, 16 F.3d at 919; see
also Brock v. Robbins, 830 F.2d 640, 647 (7th Cir. 1987) (rejecting
the idea that, in enacting ERISA, Congress intended to deter
"imprudent but harmless conduct").
So far, so good, in that all parties agree that causation
must be found to sustain a recovery for plaintiffs. What the
parties dispute is who bears the burden of proving (or disproving)
causation. To answer this question, we begin with the extant
precedent, followed by our own analysis.
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. Compare Tatum v.
RJR Pension Inv. Comm., 761 F.3d 346, 363 (4th Cir. 2014) (adopting
in the ERISA context the "long recognized trust law principle . . .
that once a fiduciary is shown to have breached his fiduciary duty
and a loss is established, he bears the burden of proof on loss
causation"); McDonald v. Provident Indem. Life Ins. Co., 60 F.3d
- 32 -
234, 237 (5th Cir. 1995) (holding that once an ERISA plaintiff
proves "a breach of a fiduciary duty and a prima facie case of
loss to the plan[,] . . . the burden of persuasion shifts to the
fiduciary" to disprove causation (internal quotation marks
omitted)); Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992)
("[O]nce the ERISA plaintiff has proved a breach of fiduciary duty
and a prima facie case of loss to the plan or ill-gotten profit to
the fiduciary, the burden of persuasion shifts to the fiduciary to
prove that the loss was not caused by, or his profit was not
attributable to, the breach of duty.") with Pioneer Centres Holding
Co. Emp. Stock Ownership Plan & Tr. v. Alerus Fin., N.A., 858 F.3d
1324, 1337 (10th Cir. 2017), cert. dismissed per stipulation, No.
17-667, 2018 WL 4496523 (U.S. Sept. 20, 2018) (adopting the
ordinary default rule to hold that "the burden falls squarely on
the plaintiff asserting a breach of fiduciary duty claim under
§ 1109(a) of ERISA to prove losses to the plan 'resulting from'
the alleged breach of fiduciary duty"); Saumer v. Cliffs Natural
Resources Inc., 853 F.3d 855, 863 (6th Cir. 2017) ("[A] plaintiff
must show a causal link between the failure to investigate and the
harm suffered by the plan." (internal quotation marks omitted));
Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1099 (9th
Cir. 2004) (same); Willett v. Blue Cross & Blue Shield of Ala.,
953 F.2d 1335, 1343 (11th Cir. 1992) (instructing that "[o]n
- 33 -
remand, the burden of proof on the issue of causation will rest on
the beneficiaries").15
We join those circuits that approve a burden-shifting
approach. Our reasoning begins with the language of the statute.
As we have already noted, that language -- establishing that a
breaching fiduciary shall be liable for any losses to the plan
"resulting from" its breach, 29 U.S.C. § 1109(a) -- clearly
requires a causal connection between a breach and a loss in order
to justify compensation for the loss. Like many statutes that
provide a cause of action, section 1109(a) does not explicitly
state whether the plaintiff bears the burden of proving that causal
link or whether the defendant must prove the absence of causation.
Two interpretative approaches offer potential for resolving that
question in the face of the text's silence.
First, there is what the Supreme Court has called the
"ordinary default rule." Schaffer ex rel. Schaffer v. Weast, 546
U.S. 49, 56 (2005). Under this rule, courts ordinarily presume
that the burden rests on plaintiffs "regarding the essential
aspects of their claims." Id. at 57. That normal rule, however,
"admits of exceptions." Id. For example, "[t]he ordinary rule,
15 We take no position on whether the Second Circuit has
adopted the burden-shifting approach because it has no impact on
our analysis. Compare New York State Teamsters Council Health and
Hosp. Fund v. Estate of DePerno, 18 F.3d 179, 180 (2d Cir. 1994)
with Silverman v. Mutual Ben. Life Ins. Co., 138 F.3d 98, 104 (2d
Cir. 1998).
- 34 -
based on considerations of fairness, does not place the burden
upon a litigant of establishing facts peculiarly within the
knowledge of his adversary," id. at 60 (alteration in original)
(quoting United States v. New York, N.H. & H.R. Co., 355 U.S. 253,
256 n.5 (1957)), although there exist qualifications on the
application of this exception. Id.
Second, ERISA brings to bear its own interpretative
guidance. As we have already pointed out, supra, and will explain
in greater detail, when the Supreme Court confronts a lack of
explicit direction in the text of ERISA, it regularly seeks an
answer in the common law of trusts. See generally Varity Corp.,
516 U.S. at 496–97; see also id. at 502, 506–07. The common law
of trusts -- like ERISA -- classifies causation as an element of
a claim for breach of fiduciary duty. See Restatement (Third) of
Trusts, § 100 cmt. e. It also places the burden of disproving
causation on the fiduciary once the beneficiary has established
that there is a loss associated with the fiduciary's breach. Id.
cmt. f. This burden allocation has long been the rule in trust
law. See Tatum, 761 F.3d at 363 (describing it as a "long-
recognized trust law principle").
So how much weight should we place on ERISA's borrowing
of trust law in the face of Schaffer's default rule? In answering
this question, we are guided by three observations: that ERISA's
borrowing of trust law principles is robust; that trust law's
- 35 -
burden allocation best fits the balance ERISA seeks to achieve
between the interests of fiduciaries and beneficiaries; and that
in this case, borrowing trust law's burden allocation actually
poses no conflict with Schaffer's approach to burden allocation.
We explain.
The Supreme Court has time and again adopted ordinary
trust law principles to construe ERISA in the absence of explicit
textual direction. In LaRue v. DeWolff, Boberg & Associates, Inc.,
the Court confronted a demand to recover lost profits under one of
ERISA's civil enforcement provisions, which makes no mention of
lost profits. 552 U.S. 248 (2008). It reasoned: "Under the
common law of trusts, which informs our interpretation of ERISA's
fiduciary duties, trustees are 'chargeable with . . . any profit
which would have accrued to the trust estate if there had been no
breach of trust . . . .'" Id. at 253 n.4 (first alteration in
original) (internal citation omitted) (quoting Restatement
(Second) of Trusts, § 205 (1957)). Confronting silence in the
text on whether certain nonfiduciary parties in interest may be
held accountable on a claim for equitable relief under ERISA
§ 502(a)(3), the Court in Harris Trust looked in part to the common
law of trusts, which it found "plainly countenances the sort of
relief sought." 530 U.S. at 250. And the Court relied on the
experience of the common law to reject an argument that untoward
effects might flow from allowing claims against nonfiduciaries.
- 36 -
Id. at 251. Most notably, in Firestone Tire & Rubber Co. v. Bruch,
the Court mirrored ordinary trust law principles in construing the
rules under ERISA that control the standard of review to be
employed in reviewing denials of ERISA benefits. 489 U.S. 101,
111 (1989) ("In determining the appropriate standard of
review . . . , we are guided by principles of trust law."). As
the Court noted, "ERISA abounds with the language and terminology
of trust law." Id. at 110.
This is not to say that we automatically adopt ordinary
trust law principles to fill in gaps in ERISA. Trust law provides
no assistance when "it is inconsistent with the language of the
statute, its structure, or its purposes." Hughes Aircraft Co. v.
Jacobson, 525 U.S. 432, 447 (1999) (internal quotation marks
omitted). Here, though, the statutory language is silent, and
Putnam points to nothing in ERISA's structure that conflicts with
the allocation of burdens under ordinary trust law.
This brings us to our next consideration: the purposes
Congress clearly sought to achieve with ERISA. In that vein, one
of Putnam's amici argues that placing on the fiduciary the burden
of disproving causation would be inconsistent with Congress's
purpose of reducing the cost of litigation so as not to dissuade
employers from establishing plans. There is no serious claim,
though, that ordinary trust law does not incorporate a similar
aim. More importantly, the Supreme Court has made clear that
- 37 -
whatever the overall balance the common law might have struck
between the protection of beneficiaries and the protection of
fiduciaries, ERISA's adoption reflected "Congress'[s] desire to
offer employees enhanced protection for their benefits." Varity
Corp., 516 U.S. at 497 (emphasis added); see also Mass. Mut. Life
Ins. Co. v. Russell, 473 U.S. 134, 156 n.17 (1985) (Brennan, J.,
concurring) ("[I]n enacting ERISA, Congress made more exacting the
requirements of the common law of trusts relating to employee
benefit trust funds." (emphasis in original) (internal quotation
marks omitted)); cf. Firestone, 489 U.S. at 114 (rejecting an
alternative standard of review on the grounds that it would "afford
less protection to employees and their beneficiaries than they
enjoyed before ERISA was enacted"). In other words, Congress
sought to offer beneficiaries, not fiduciaries, more protection
than they had at common law, albeit while still paying heed to the
counterproductive effects of complexity and litigation risk. See
Varity Corp., 516 U.S. at 497 (noting the "competing congressional
purposes" of protecting employees without "unduly discourag[ing]
employers from offering welfare benefit plans in the first place").
And it still provided substantial cost and risk reduction to
employers by establishing a uniform, federally preemptive regime
with the prospect of uniform federal guidance and regulation by
the Department of Labor.
- 38 -
ERISA's enhancement of the protections for beneficiaries
that existed at common law is reflected by the Supreme Court's
decisions in Central States, Southeast & Southwest Areas Pension
Fund v. Central Transport, Inc., 472 U.S. 559 (1985) and Fifth
Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). Those are
the clearest examples of the Court opting not to follow an
applicable common law rule in applying ERISA. In both instances,
the Court rejected the ordinary trust law rules in a manner that
enhanced rather than reduced the protection of beneficiary
interests to the arguable detriment of employers. Central States,
472 U.S. at 572 (holding ERISA fiduciaries to the "more specific
trustee duties itemized in the Act"); Fifth Third Bancorp, 134 S.
Ct. at 2469 (relying on Central States's "holding that, by contrast
to the rule at common law, trust documents cannot excuse trustees
from their duties under ERISA" (internal quotation marks
omitted)). In short, when interpreting the application of ERISA
in the absence of statutory guidance, the Supreme Court has usually
opted for the common law approach except when rejection was
necessary to provide enhanced beneficiary protections. But cf.
Conkright v. Frommert, 559 U.S. 506, 516 (2010) (adopting Varity's
guidance that "trust law does not tell the entire story" and
extending the deference given to plan administrators'
interpretation of plans on the grounds that it protects the
interests of employers, in line with Congressional intent);
- 39 -
Mertens v. Hewitt Associates, 508 U.S. 248, 253–54 (1993)
(suggesting in dicta that the common law trust rule allowing
"knowing participation" liability to be imposed on both co-
fiduciaries and third parties does not apply in the ERISA context).
On such a record, it would be strange to reject trust law's rules
on burden allocation in favor of an attempt to reduce employer
costs, especially where the benefit of such a reduction would flow
exclusively to employers whose breaches were followed by losses to
the plan.
Finally, we work our way back to Schaffer. We began by
presenting the two interpretative paths embodied in Schaffer and
Varity. We could read these cases as establishing alternative
rules of construction, one generally applicable and the other more
specifically applicable to ERISA. Under such a reading, we would
opt for Varity's specific over Schaffer's general. Or we might
read Varity's guidance as simply one of the exceptions to
Schaffer's ordinary, but not universally-applicable, default rule.
Under both readings, we end up in the same place: applying trust
law principles. We nevertheless prefer the latter approach in
this case because one important reason behind the ordinary trust
rule for allocating the burden of proof aligns so well with the
exception to Schaffer's default rule recognized in Schaffer
itself. That exception recognizes that the burden may be allocated
to the defendant when he possesses more knowledge relevant to the
- 40 -
element at issue. Schaffer, 546 U.S. at 60. Trust law has long
embodied similar logic. See Restatement (Third) of Trusts, § 100
cmt. f (noting that the general rule placing on the plaintiff the
burden of proving his claim "is moderated in order to take account
of . . . the trustee's superior (often, unique) access to
information about the trust and its activities"); cf. 1 Joseph
Story, Commentaries on Equity Jurisprudence: As Administrator in
England and America, § 322 (1836) (noting that the trust
beneficiary may "not have it in his power distinctly and clearly
to show" that the trustee made a bargain advantageous to himself).
In short, even if there were no freestanding expectation that the
interpretation of ERISA would be informed by trust law generally,
on the specific matter of allocating the burden of proving
causation the ordinary trust law rule could stand on its own feet
as an exception to the default rule that Schaffer itself
recognizes.
Common sense strongly supports this conclusion in the
modern economy within which ERISA was enacted. An ERISA fiduciary
often -- as in this case -- has available many options from which
to build a portfolio of investments available to beneficiaries.
In such circumstances, it makes little sense to have the plaintiff
hazard a guess as to what the fiduciary would have done had it not
breached its duty in selecting investment vehicles, only to be
told "guess again." It makes much more sense for the fiduciary to
- 41 -
say what it claims it would have done and for the plaintiff to
then respond to that.
It is also true that this common sense concern could be
addressed by a mere shift in the burden of production rather than
the burden of persuasion, and Schaffer applies only to the latter.
546 U.S. at 56. And because ERISA cases rarely involve jury
instructions, it is likely that very few cases will actually leave
the question of causation "in evidentiary equipoise." Id. at 58.16
So it would not be farfetched to chart a third route by defaulting
to Schaffer's ordinary rule on the burden of proof while
nevertheless requiring the fiduciary to first put forward its view
of what likely would have happened but for the alleged fiduciary
breach. Neither party, though, has briefed such a middle ground.
More importantly, we have many decades of experience with the
allocation of the burden of proof called for routinely by trust
law, with no evidence of any particular difficulties, unfairness,
or costs in applying that rule in the few cases in which it actually
makes a difference. Cf. Metropolitan Life Ins. Co. v. Glenn, 554
U.S. 105, 113 (2008) ("[W]e note that trust law functions well
with a similar standard."). We therefore opt for a well-trodden
path rather than risk introducing unforeseeable complexities with
a more novel approach.
16Because the district court resolved this case mid-trial,
the burden of persuasion makes all the difference here.
- 42 -
For the foregoing reasons, we 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. See Tatum, 761 F.3d
at 363; McDonald, 60 F.3d at 237; Martin, 965 F.2d at 671.17 In
so ruling, we stress that nothing in our opinion places on ERISA
fiduciaries any burdens or risks not faced routinely by financial
fiduciaries. While Putnam warns of putative ERISA plans foregone
for fear of litigation risk, it points to no evidence that
employers in, for example, the Fourth, Fifth, and Eighth Circuits,
are less likely to adopt ERISA plans. Moreover, 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. And any fiduciary that decides it can find funds that beat
the market will be immune to liability unless a district court
finds it imprudent in its method of selecting such funds, and finds
17
Tatum, McDonald, and Martin use the term "prima facie case
of loss," apparently requiring an even lesser showing by the
plaintiff. However, in describing the "long-recognized trust law
principle" of burden-shifting, the court in Tatum referred simply
to "loss," without the qualifier. 761 F.3d at 363. We
intentionally use the term "loss," rather than "prima facie loss,"
because when a factfinder concludes that a plan suffered no actual
loss, the issue of causation need not be decided, even if there
was prima facie evidence of loss.
- 43 -
that a loss occurred as a result. In short, these are not matters
concerning which ERISA fiduciaries need cry "wolf."
This holding, together with our conclusion that the
district court erred in finding that plaintiffs failed as a matter
of law to make even a prima facie showing of loss, requires vacatur
of the district court's entry of judgment against plaintiffs on
their prudence claim. We remand for the district court to complete
the bench trial in order to definitively decide whether Putnam
breached the duty of prudence and, if so, to decide whether
plaintiffs have shown a loss to the Plan and, if so, to decide
whether Putnam can meet its burden of showing that the loss most
likely would have occurred even if Putnam had been prudent in its
selection and monitoring procedures.
B.
Plaintiffs also argue that the district court erred in
dismissing their claim for breach of the duty of loyalty. Under
ERISA, fiduciaries "shall discharge their duties with respect to
a plan 'solely in the interest of the participants and
beneficiaries,' that is, 'for the exclusive purpose of
(i) providing benefits to participants and their beneficiaries;
and (ii) defraying reasonable expenses of administering the
plan.'" Pegram v. Herdrich, 530 U.S. 211, 223–24 (2000) (citations
omitted) (quoting 29 U.S.C. § 1104(a)(1)).
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Plaintiffs' position is that Putnam failed to act in the
best interests of Plan participants because it included Putnam
funds by fiat, retained those funds even though they were
underperforming, buried evidence that many of the funds were
receiving failing grades, and failed to consider any alternative
investment options from other companies. The district court
reasoned that merely "identifying a potential conflict of interest
alone is not sufficient to establish a breach of the duty of
loyalty." Brotherston, 2017 WL 2634361, at *3; see also id. at *8.
Even pointing to self-dealing is not enough, reasoned the court,
at least where the self-dealing (selecting proprietary funds for
plan investments) is a common industry practice within the scope
of an express exception. Id. at *3, *8. Rather, the district
court found, to establish a claim for breach of the duty of loyalty
plaintiffs were required to prove that defendant's motivation in
taking these actions was to put its own interests ahead of those
of Plan participants. Id. "Evaluating the totality of the
circumstances," the district court also found that plaintiffs had
failed to establish improper motivation. Id. at *8. It therefore
dismissed plaintiffs' breach of loyalty claim. Id.
We review the district court's weighing of the evidence
for clear error. See Mullin, 284 F.3d at 36–37. Plaintiffs in
turn offer four reasons for finding such error.
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First, they argue that the district court incorrectly
employed a balancing test to dismiss their loyalty claim by
crediting Putnam for contributions it made as settlor. This
argument misreads the district court's order, which plainly hinged
its loyalty analysis on plaintiffs' failure to point to specific
instances of disloyalty, rather than on Putnam's contributions as
employer.
Second, plaintiffs argue that the district court erred
in holding that a duty of loyalty claim requires a showing of
improper motivation. Plaintiffs contend that "purported good
intentions do not excuse disloyal actions." But to be loyal is to
possess a certain state of mind, one "unswerving in allegiance."
Merriam–Webster's Collegiate Dictionary 738 (11th ed. 2012)
(definition of loyal); see also id. ("faithful in
allegiance . . ."). This is why, in reviewing ERISA duty of
loyalty claims, we have asked whether the fiduciary's "operative
motive was to further its own interests." Ellis v. Fid. Mgmt. Tr.
Co., 883 F.3d 1, 6 (1st Cir. 2018).
Third, plaintiffs claim that the district court treated
the exceptions for prohibited transactions as "a safe harbor from
breach of fiduciary duty claims." The district court did no such
thing. Rather, the district court simply stated that plaintiffs
did not carry their burden of persuasion merely by pointing to
transactions that were expressly exempt from the prohibitions of
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sections 1106(a) and (b), particularly where such exempt
transactions were common in the industry. And to the extent that
Putnam engaged in a non-exempt prohibited transaction, it would be
liable under section 1106 itself, which "supplements" the general
duty of loyalty. Harris Trust, 530 U.S. at 241.
Finally, plaintiffs argue that, even if a breach of the
duty of loyalty does require improper motivation, there is
sufficient evidence that Putman's decisions were motivated by an
intent to benefit itself. Even assuming that to be so, the
sufficiency of the evidence to prove plaintiffs' claim is not at
issue on this appeal. Rather, the question before us is whether
the evidence is so one-sided that we must deem the district court's
fact finding as clear error. And since plaintiffs point to no
action of Putnam that can be explained only by a disloyal
motivation, the district court possessed ample discretion to find
as it did.
C.
We discuss, finally, plaintiffs' claim for disgorgement.
We have recognized, supra, that Putnam can be said to have received
fees "in connection with a transaction involving the assets of the
[P]lan," 29 U.S.C. § 1106(b)(3). Such a receipt placed on Putnam
the obligation to satisfy the requirements of PTE 77-3. And to
the extent that Putnam fails on remand to qualify under that
exemption, nothing in this opinion forecloses disgorgement as an
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available remedy. Plaintiffs, though, also seek to press a broader
claim for disgorgement as part of their breach of fiduciary duty
claim under 29 U.S.C. § 1109(a), which requires a breaching
fiduciary to "restore to [the] plan" any profits "made through use
of assets of the plan."18 The district court dismissed that claim
as "legally insufficient" in view of its finding that plaintiffs
had failed as a matter of law to show loss. Our ruling that
plaintiffs' evidence may in fact be sufficient to establish a loss
eliminates the district court's basis for dismissing plaintiffs'
broader disgorgement claim, but we nevertheless affirm the
dismissal of that claim on alternative grounds.
The object of plaintiffs' desired disgorgement is
$27.9 million in fees (allegedly $37.3 million in present-day
value) obtained by Putnam as a result of offering its proprietary
funds as investment options to the Plan. The district court had
independently ruled, as part of its earlier summary judgment
decision, that those fees were not derived from Plan assets, and
thus did not implicate the bar of 29 U.S.C. § 1106(a)(1)(D) against
any "use by or for the benefit of a party in interest, of any
18
Plaintiffs also seek unspecified "equitable relief." In
view of its dismissal of all substantive claims, the district court
understandably dismissed plaintiffs' requests for injunctive
and/or declaratory relief. To the extent that proceedings on
remand result in any finding for plaintiffs on the merits of their
surviving claims, the district court will be free to consider the
availability of injunctive or declaratory relief to the extent
such relief is otherwise warranted.
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assets of the plan" or the bar of 29 U.S.C. § 1106(b)(1) against
a fiduciary "deal[ing] with the assets of the plan in his own
interest or for his own account." Plaintiffs have expressly waived
any challenge to that ruling. So defendants pointedly argue that
plaintiffs are precluded from now claiming on appeal as part of
their disgorgement claim that Putnam's fees were derived "through
use of assets of the plan." 29 U.S.C. § 1109(a).
Plaintiffs offer no argument at all for how the fees at
issue could not have qualified as "use by or for the benefit of
[Putnam] of any assets of the plan" under section 1106(a)(1)(D),
or a "deal with the assets of the plan" under section 1106(b)(1),
yet nevertheless be deemed to have been obtained by Putnam "through
use of" Plan assets under § 1109(a). Plaintiffs have therefore
waived any argument that the fees are subject to disgorgement under
§ 1109(a).
IV.
Regarding the district court's summary judgment ruling,
we affirm the district court's dismissal of plaintiffs' prohibited
transaction claim under section 1106(a)(1)(C); we vacate the
district court's dismissal of plaintiffs' prohibited transaction
claim under section 1106(b)(3); and we remand for further
proceedings. With respect to the district court's order entering
judgment on partial findings, we affirm the dismissal of
plaintiffs' breach of loyalty claim and the dismissal of their
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disgorgement claim, except to the extent that disgorgement may be
a remedy for a prohibited transaction claim; we vacate the finding
that plaintiffs have failed as a matter of law to show loss; and
we remand for further consideration of plaintiffs' prudence claim
in light of our holding on the burden-shifting issue. Costs are
awarded to the plaintiffs.
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.
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