Compliance

Court Rules for Putnam in Excessive Fee Suit

A district court ultimately found that since plaintiffs did not establish a case in which a particular fiduciary breach caused a loss to the plan, their arguments fail.

By Rebecca Moore editors@plansponsor.com | June 21, 2017
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A federal district court has entered judgment for Putnam Investments and its 401(k) plan’s committees in a case alleging self-dealing in its investment fund lineup for the plan and excessive fees for lack of monitoring and replacing investments.

Previously U.S. District Judge William G. Young of the U.S. District Court for the District of Massachusetts dismissed prohibited transactions claims saying they were time-barred under the Employee Retirement Income Security Act’s (ERISA)’s three-year statute of limitations. In his most recent decision, Young ruled for Putnam on all remaining claims.

In his decision, Young noted that from the beginning of the class period through January 31, 2016, all of the designated investment options available under the plan’s investment menu were affiliated with Putnam. With the exception of certain categories of funds, i.e., close-end mutual funds, hedge funds, and tax-exempt funds, all Putnam open-end mutual funds were added to the plan lineup upon launch, as required by the plan document. Up until early 2016, non-affiliated investments were offered exclusively through the plan’s self-directed brokerage account option. Starting on February 1, 2016, the plan’s investment menu included six BNY Mellon collective investment trusts (CITs).

According to the decision, for a period of time, the plan investment committee reviewed reports compiled by the Advised Asset Group (AAG), a subsidiary of Great-West. The AAG Reports showed that a number of Putnam funds were given “fail” ratings, but after internal discussions, the committee determined that the AAG Reports did not provide an accurate indication of fund performance. Still, Putnam recommended the AAG Reports as a source of investment advice to plan participants on their account statements.

The investment committee regularly reviews the qualified default investment alternative (QDIA) funds for risk-adjusted returns, costs, asset allocation, and performance as compared to competitors. “It is undisputed that [committee] followed a prudent process in reviewing and monitoring the QDIA funds,” Young wrote in his decision.

However, for other investments, the investment committee appeared to rely entirely on the expertise of the investment division to determine whether a fund was failing and needed to be shut down. As a result, the committee did not seem to have independent standards or criteria for monitoring the plan investments. The decision notes that the committee never once removed a fund from the plan lineup, and there seems not to have been separate discussion within the investment division as to whether a particular fund was appropriate for the plan.

NEXT: Arguments and discussion

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