Employee suit over 'imprudent' 401k investments can proceed.


Byline: Pat Murphy

Former employees of Putnam Investments can proceed with an ERISA class action against their former employer and other plan fiduciaries based on allegations that they suffered losses as a result of the investment options selected for their 401(k) plan, the 1st U.S. Circuit Court of Appeals has decided.

U.S. District Court Judge William G. Young granted a defense motion for summary judgment dismissing the plaintiffs' claim that the defendants engaged in prohibited transactions in violation of ERISA. Young further found that the plaintiffs failed to prove that any lack of care in selecting the plan's investment options resulted in losses to the plan.

But a unanimous 1st Circuit panel concluded that Young improperly placed the entire burden of proof on the issue of causation on the plaintiffs. Noting a circuit split on the issue, the panel found that such claims are to be analyzed under a burden-shifting framework.

"[W]e 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," Judge William J. Kayatta Jr. wrote on behalf of the court.

In addition, the 1st Circuit concluded that the plaintiffs could go forward with a claim alleging that the defendants violated 1106(b)(3) because Putnam received fees from the funds in which the plan invested.

The 50-page decision is Brotherston, et al. v. Putnam Investments, LLC, et al., Lawyers Weekly No. 01-213-18. The full text of the ruling can be found here.

Supreme Court-bound?

Boston's James R. Carroll, who represents the defendants, did not respond to requests for comment.

However, on Oct. 24, Carroll filed a defense motion requesting that the 1st Circuit stay its mandate in Brotherston to allow the defendants to file a petition for a writ of certiorari with the U.S. Supreme Court.

"Appellees' petition will present a substantial question for the Supreme Court whether the plaintiff or the defendant bears the burden of proof on loss causation under ERISA 409(a)," Carroll wrote.

On Oct. 29, Kayatta granted the requested stay, giving the defendants 90 days to file their petition.

The plaintiffs are represented by James H. Kaster of Minneapolis. Kaster said Brotherston is a significant decision in favor of plan participants on the issue of loss, one that prevents the recognition of a standard that many in the defense bar view as an insurmountable obstacle to...

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