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,
PUTNAM INVESTMENTS, LLC; PUTNAM BENEFITS OVERSIGHT COMMITTEE; PUTNAM BENEFITS INVESTMENT COMMITTEE; ROBERT REYNOLDS; PUTNAM INVESTMENT MANAGEMENT LLC; PUTNAM INVESTOR SERVICES, INC., Defendants, Appellees.
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. William G. Young, U.S. District Judge]
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.
Ellen Signorille, William Alvarado Rivera, and Matt Koski, on
brief for amici curiae AARP, AARP Foundation, and National
Employment Lawyers Association.
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.
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
Torruella, Thompson, and Kayatta, Circuit Judges.
KAYATTA, CIRCUIT JUDGE
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 rulings, we vacate the district court's
judgment in part and remand for further proceedings.
begin with a basic outline of the undisputed facts and the
procedural history of this case, reserving further details
for our analysis. 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.
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. Most of Putnam's mutual funds offered
under the Plan are "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.
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 . . . .").
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,  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.
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 proprietary. 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.
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
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, 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.
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. 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 . . . .
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).
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). 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.
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
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
Id. § 1108(c)(2) (emphasis added).
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 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
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.
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. 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." In addition, Sirri concluded in his