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Putnam Self-Dealing Ruling

The claims allege that Putnam engaged in self-dealing by offering only proprietary funds within its 401(k) Plan. Putnam also allegedly failed to investigate both non-proprietary and proprietary funds for the Plan, selecting only proprietary funds and constituting a prohibited transaction under ERISA. The defendants however claimed that investment fees are paid out of mutual fund assets, not plan assets. The judge ruled that the claim of prohibited transactions fails as a “matter of law,” referencing the Fidelity float income case, which adopted a narrow definition of plan assets.

The lawsuit also claimed that the Putnam fund fees exceeded those of other funds, in particular, Vanguard passively managed index funds. The judge found the comparison flawed as Vanguard, a low-cost investment manager, operates index funds “at cost” verses Putnam, which offers both passive and active products for profit. His ruling favored the defendant, as Putnam funds and Vanguard funds are in a sense not comparable.

Ultimately, the U.S. District Court of Massachusetts sided with Putnam Investments against allegations of prohibited transactions on the basis that such allegations are time-barred under ERISA’s 3-year statute of limitations. (Of note, Putnam converted funds offered within the Plan from Y shares to less expensive R6 shares in 2015).

www.planadviser.com; April 7, 2017.