Putnam Investments, LLC v. Brotherston: The End of “Business as Usual” for 401(k) Plans

Earlier this year I posted an article on this blog, “Putnam Investments, LLC v. Brotherston: Pivotal Point for 401(k)/403(b) Industries?” The article focused on the potential impact of the case regarding both the general operation of 401(k) plans and legal liability for plans and plan sponsors.

The First Circuit Court of Appeals reversed the district court on a number of its decisions and remanded the case back to the circuit court to continue the trial based on the First Circuit’s rulings.The case has been suspended to date, as Putnam applied to the Supreme Court (SCOTUS) for a writ of certiorari, asking the Supreme Court to review the First Circuit’s rulings.

SCOTUS asked the Solicitor General to review the case and provide the Court with an evaluation of the case by filing an amicus brief with the Court. The Solicitor General has recently filed the requested amicus brief with SCOTUS.The Solicitor General stated that the case presented two issues:

  1. Whether, in an action for fiduciary breach under 29 U.S.C. 1109(a), a fiduciary bears the burden of proving that a loss is not attributable to the fiduciary’s breach once the plaintiff establishes a breach and related plan losses?
  2. Whether comparisons between the returns on a plan’s investment portfolio and the returns on an index- fund portfolio are insufficient as a matter of law to support a finding of loss?3

The Court of Appeals had answered “yes” to the first question and “no” to the second question. The Solicitor General concluded that “[t]he court of appeals correctly decided both questions.”4

As a result, the Solicitor General advised the Court not to hear the case. If the Court follows the Solicitor General’s advice, the case will go back to the district court and the trial will resume.

The First Domino – Burden of Proof As to the Causation of Damages
A key aspect of both the Court of Appeals’ decision and the Solicitor General’s amicus brief was their agreement with reference to the difference between the burden of proof on causation in civil cases and trust cases. Given that the Solicitor General liberally quoted from the Court of Appeals’ decision, I will only reference provisions from the Solicitor General’s amicus brief.

The Solicitor General first addressed the significant difference between the burden of proof in civil cases and trust cases:

The “default rule” in ordinary civil litigation when a statute is silent is that “plaintiffs bear the burden of persuasion regarding the essential aspects of their claims.” But “[t]he ordinary default rule, of course, admits of exceptions.” One such exception applies under the law of trusts.

This Court has repeatedly made clear that ERISA’s fiduciary duties are “derived from the common law of trusts.”  Accordingly, “[i]n determining the contours of an ERISA fiduciary’s duty, courts often must look to the law of trusts.” Under trust law, “when a beneficiary has succeeded in proving that the trustee has committed a breach of trust and that a related loss has occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach.5

The Solicitor General then addressed the rational behind the burden-shifting framework in trust cases, specifically in ERISA actions:

Applying trust law’s burden-shifting framework to ERISA fiduciary-breach claims also furthers ERISA’s purposes. In trust law, burden shifting rests on the view that “as between innocent beneficiaries and a defaulting fiduciary, the latter should bear the risk of uncertainty as to the consequences of its breach of duty.”6

ERISA likewise seeks to ‘protect the interests of participants in employee benefit plans’ by imposing high standards of conduct on plan fiduciaries. Applying trust law’s burden-shifting framework, which can serve to deter ERISA fiduciaries from engaging in wrongful conduct, thus advances ERISA’s protective purposes.7

By contrast, declining to apply trust-law’s burden-shifting framework could create significant barriers to recovery for conceded fiduciary breaches.  The fiduciary is in the best position to provide information about how it would have made investment decisions in light of the objectives of the particular plan and the characteristics of plan participants. Indeed, this Court [has] recognized… that it is appropriate in some circumstances to shift the burden to establish ‘facts peculiarly within the knowledge of” one party.8

The Solicitor General then addressed Putnam’s claim that the Supreme Court should hear the case to resolve the split between the federal Courts of Appeal on the burden of proof as to causation issue, stating that

Petitioners assert that the courts of appeals are ‘deeply divided about which party bears the burden of persuasion regarding causation.’ Although some disagreement exists on that question, the decision below is consistent with decisions of the majority of the courts of appeals that have directly addressed it, and the contrary view is not as widely held as petitioners assert.9

In an interesting twist with  regard to the issue of fiduciary liability involving ERISA plans in general, as well as any concerns by plans about having to meet the burden of proof with regard to causation, the Court of Appeals offered ERISA plans the following advice:

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 that a loss occurred as a result. In short, these are not matters concerning which ERISA fiduciaries need cry “wolf.”10  (citations omitted)

Interestingly enough, this was essentially the same advice offered over forty years ago by John Langbein, the reported on the committee that drafted the Restatement (Third) of Trust, with him prediction that

When market [aka index] funds have become available in sufficient variety and their experience bears out their prospects, courts may one day conclude that it is imprudent for trustees to fail to use such vehicles. Their advantages seem decisive: at any given risk/return level, diversification is maximized and investment costs minimized. A trustee who declines to procure such advantage for the beneficiaries of his trust may in the future find his conduct difficult to justify.”11

The Solicitor General then addressed the issue regarding the admissibility of using index funds for the purpose of proving losses in ERISA actions alleging a breach of fiduciary duties.

The court of appeals also correctly concluded that passively managed index funds are not, as a matter of law, improper comparators for determining whether a loss has occurred from an ERISA fiduciary’s breach involving the improper monitoring of actively managed funds….The court noted that “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. …’”12

Bottom Line Implications Going Forward
What does all this mean? The case goes back to the district court and the trial continues based upon the Court of Appeals’ rulings. If the plan participants can establish that the plan sponsor breached either their fiduciary duty of loyalty and/or their duty of prudence, resulting in a loss for the plan participants, then the plan sponsor has the burden of proving that such breaches did not cause any of the losses sustained by the plan participants.

On a broader perspective, I personally do not believe that plan sponsors can meet that burden of proof in many cases, for reasons I will discuss later in this post. Furthermore, I believe that the 401(k) industry and mutual fund companies know that they will not be able to meet that burden proof, resulting in liability for breaches of their fiduciary duties, both in the Putnam case and in future 401(k) fiduciary actions.

As both the Court of Appeals and the Solicitor General pointed out, SCOTUS has recognized the Restatement of Trusts (Restatement) as the authoritative source in resolving fiduciary questions. The Restatement includes three key provisions regarding a fiduciary’s duty of prudence:

  • Section 90, aka The Prudent Investor Rule, comment b, states that cost-consciousness is a fundamental duty in connection with prudent investing;13
  • Section 90, comment f, states that a fiduciary has a duty to seek the highest rate of return for a given level of cost and risk, or conversely, the lowest level of cost and risk for a given level off return14; and
  • Section 90, comment h(2), states that due to the higher costs and risks associated with actively managed mutual funds, a fiduciary should only recommend and/or utilize such funds when it can be objectively estimated that the anticipated return from such funds will provide a level of return that will offset such additional costs and risks.15

The predominant invest options in many 401(k) plan continue to be actively managed mutual funds. However, the evidence with regard to the historical performance of actively managed mutual funds shows that the overwhelming majority of actively managed funds are cost-inefficient, not only consistently underperforming comparable passively managed, or index funds, but doing so at a significantly higher price.16 So much for the three fiduciary requirements of prudence set out in the Restatement.

The cost-inefficiency issues associated with actively managed mutual funds become even more egregious when examined more closely in terms of effective return, effective cost, and potential closet index status. In order to effectively evaluate mutual funds, one need to evaluate a fund’s returns on three level: nominal return, load–adjusted return (if applicable), and risk-adjusted return. An actively managed fund’s return at each level is then compared to the returns of a benchmark, usually a comparable index fund.

However analyzing an actively managed fund on returns is only half the due diligence process. As previously mentioned, the evidence with regard to the historical performance and costs of actively managed mutual funds shows that these funds consistently fail to meet both prongs of the Restatement’s cost-efficiency test, especially when examined in terms of their potential classification as closet index funds.

  • 99% of actively managed funds do not beat their index fund alternatives over the long term net of fees.17
  • Increasing numbers of clients will realize that in toe-to-toe competition versus near–equal competitors, most active managers will not and cannot recover the costs and fees they charge.18
  • [T]here is strong evidence that the vast majority of active managers are unable to produce excess returns that cover their costs.19
  • [T]he investment costs of expense ratios, transaction costs and load fees all have a direct, negative impact on performance….[The study’s findings] suggest that mutual funds, on average, do not recoup their investment costs through higher returns.20

There is no precise, universally accepted criteria for designation as a closet index fund. Certain factors between an actively managed fund and a benchmark index are often used in assessing closet index status, including factors such as high correlations of returns, commonly referred to as a fund’s R-squared rating; tracking error; the extent of an actively managed fund’s deviation from an index fund’s returns; and the extent of overlapping of a funds’ portfolio holdings, or ”active share.”

Determining the cost-efficiency of a fund also requires an evaluation of a fund’s stated and effective fees and expenses. In evaluating a fund’s fees and expenses, most investors and fiduciaries only focus on a fund’s annual expense ratio and any sales charges, or loads. However, studies by respected investment experts such as Burton Malkiel21,  Mark Carhart22, and Roger Edelen23 have concluded that the two most reliable predictors or a fund’s success are it s annual expense ratio and its trading costs.

However, mutual funds are not legally required to disclose their actual trading costs. Trading costs are deducted by a mutual funds as part of a fund’s overall operating expenses and are deducted in calculating a fund’s stated returns.

However, a fund’s trading costs simply have too much potential impact on an investor’s end return to simply ignore. Fortunately, John Bogle, founder of the Vanguard mutual fund family, created a simply metric that can be used as a proxy for a fund’s trading costs. Bogle’s metric simply doubles a fund’s reported turnover and multiplies that number by 0.60. While it is generally acknowledged that Bogle’s metric probably understates a fund’s actual trading costs, it at least allows investors, fiduciaries and attorneys to factor such costs into the due diligence/vetting process.

Cost-Efficiency and the Active Management Value Ratio™ 3.0   
Several years ago I created a metric that factors in all of the key criteria set out in the Restatement. InvestSense’s proprietary metric, the Active Management Value Ratio™ (AMVR), is designed to allow investors, fiduciaries, and attorneys to easily evaluate the cost-efficiency, or the relative value, of actively managed mutual funds.

The AMVR is based on the principles set out in the Restatement, as well as the studies of investment icons Charles D. Ellis and Burton G. Malkiel.

The incremental fees for an actively managed mutual fund relative to its incremental returns should always be compared to the fees of a comparable index fund relative to its returns. When you do this, you’ll quickly see that the incremental fees for active management are really, really high-on average, over 100% of incremental returns.24
Charles D. Ellis

Past performance is not helpful in predicting future returns. The two variable that do the best job in predicting future performance of [mutual funds] are expense ratios and turnover.25
Burton G. Malkiel

Our example compares the retail shares of a popular actively managed, domestic large cap growth fund, with a comparable large cap growth index fund, the Vanguard Growth Index Fund (VIGRX). The AMVR indicates that the actively managed fund is not cost-efficient, and thus an imprudent investment choice, relative to VIGRX.

In this case, the front-end load fee results in the index fund outperforming the actively managed fund’s five-year performance. Funds that underperform their benchmark do not qualify for an AMVR rating since their underperformance automatically makes them an imprudent investment choice relative to the benchmark.

Another benefit of the AMVR is that it calculates the losses suffered by an investor, both in terms of underperformance and management fees. The AMVR also provides investors, investment fiduciaries and attorneys with a cost-efficiency score, as shown under the “% Fees/% Return” analysis. In this case, using the actively managed fund’s nominal, or stated, expense ratio, 75 percent of the actively managed fund’s expense ratio provides no positive return/benefit for the fund’s investors.

It should be noted that mutual fund companies generally do not normally impose a front-end load on retirement shares. Therefore, the AMVR only calculates the nominal and risk-adjusted return on retirement shares.

Using the fund’s AER-adjusted annual expense ratio to calculate the fund’s implicit return, the combination of the fund’s high AER number and its high R-squared correlation number to the benchmark (98) results in a much higher cost-inefficiency number. It is hard to imagine a financial adviser trying to justify the recommendation of a fund where 96 percent of the fund’s expense provides absolutely no positive incremental return/benefit for an investor.

Calculating the AMVR for retirement shares of a fund essentially uses the same process, the only difference being that retirement shares should never impose any type of load fee, neither a front-end or back-end load. Any fund that does so is not only imprudent vis-à-vis a 401(k) plan participant, but more importantly, would be in violation of ERISA prohibited transaction rules.

The following chart shows an example of a forensic AMVR analysis of the retirement shares of the same two funds without the imposition of a front-end load on the actively managed fund. In this case, the actively managed fund does slightly outperform the benchmark fund by 16 basis points. (A basis point equals 1/100 of 1 percent, or .01 percent, so 100 basis points equals 1 percent.

However, the fund’s incremental cost exceeds the actively managed fund’s incremental returns, resulting in an AMVR number greater than 1.00 (3.43 using the fund’s nominal expense ratio, 27.87 using the fund’s AER-adjusted expense ratio). As a result, the actively managed fund would be deemed to be cost-efficient and an imprudent investment choice.

Financial advisers have always argued that the prudence of their advice should be evaluated on factors other than just cost. The Restatement agrees, pointing out that in assessing the prudence of investment advice, any and all costs of the investment products recommended should be evaluated relative to the value received in exchange for such costs.26

That is exactly what the AMVR does. The AMVR is simply a cost/benefit analysis that compares the incremental costs of an actively managed mutual fund to its incremental return, if any, relative to a comparable index fund.

The beauty of the AMVR is its simplicity. In interpreting a fund’s AMVR scores, an attorney, fiduciary or investor only has to answer two questions:

(1) Does the actively managed mutual fund produce a positive incremental return?
(2) If so, does the fund’s positive incremental return exceed it incremental costs?

If the answer to either of these questions is “no,” then the fund does not qualify as cost-efficient under the Restatement’s guidelines.

Additional information about the AMVR is available throughout this blog.

Closet Indexing and the AMVR 
The AMVR factors in Ross Miller’s Active Expense Ratio (AER) metric allows investors and fiduciaries to factor in the ongoing problem of “closet indexing.”27 Closet index funds are generally described as actively managed mutual funds that closely track, or “mirror,” the performance of a relevant index or a comparable index fund, yet generally charge a significantly higher annual expense ratio and charge higher overall costs than a comparable index fund.

Closet index funds are often identified through the use of a fund’s R-squared number. Morningstar defines a fund’s R-squared number as “the relationship between a [fund] and its benchmark. It can be thought of as a percentage from 1 to 100,… It is simply a measure of the correlation of the [fund’s] returns to the benchmark’s returns.”28

In our example, adjusting the actively managed fund for its extremely high 5-year (6-28-2013 to 6-28-2018) R-squared number relative to VIGRX, 0.97, results in an AER of 4.64. As a result, the actively managed fund’s AER-adjusted incremental costs essentially accounts for all the fund’s expenses, without  providing any commensurate benefit at all for an investor in comparison to VIGRX.  Furthermore, most experts would agree that a R-squared of 97 percent alone qualifies an actively managed funds as a closet index fund relative to VIGRX.

For attorneys, the key question involving a financial adviser’s recommendation of and/or the use of closet index funds in providing wealth management services comes down to one question:

Does the selection of a closet index fund breach an ERISA fiduciary’s duties of loyalty and prudence given the combination of the fund’s higher annual expense ratio and high R-squared correlation number, reflecting returns more attributable to the applicable benchmark rather than the fund’s management?

Further evidence of the analytical value of a fund’s AMVR can be seen in InvestSense’s forensic analysis of the “Pensions & Investment” Top Ten Defined Contribution Mutual Funds survey. Each year InvestSense performs an AMVR forensic analysis of the top ten non-index mutual funds on that list to determine the cost-efficiency of those funds. The most recent “Pensions & Investments” Top Ten AMVR forensic analysis (1Q 2019) is available on SlideShare.29 The results of the forensic analysis should create some concerns for plan fiduciaries, since the funds analyzed represent the top ten non-index funds currently used in defined contribution plans.

In conducting forensic analyses for pension plans, trusts and other investment fiduciaries, as well as individual investors and attorney we use both the AMVR, a quantitative metric, and the InvestSense Quotient (IQ), a qualitative metric. The IQ analyzes the overall quality of a fund in terms of consistency of performance, and efficiency of performance, both in terms of cost and risk management.

The AMVR and the Suitability Standard
While the discussion herein has focused primarily on the use of the AMVR in connection with current fiduciary standards established under the Restatement and existing law, I would strongly suggest that the same arguments are equally applicable under FINRA’s suitability and “best interests” standards. As FINRA pointed out in FINRA Notice 12-25, the suitability and “best interests” standards are “inextricably intertwined” under FINRA’s regulations.30

The fact that the AMVR shows that many funds are not cost-efficient supports an argument that such funds fail to meet FINRA Rule 2111, the so-called suitability standard. The suitability standard requires that advice provided by any broker must be suitable for at least some investors, as well as for the specific customer involved in a securities transaction. Rule 2111-SM-.0131 also sets out a “fair dealing” requirements for all of a broker’s transactions and interactions with customers. Investments that are not cost-efficient and/or otherwise cannot be expected to provide a customer with a positive benefit obviously are neither suitable for, “fair dealing” with, nor in the “best interests” of any investor.

Another potential issue is the mischaracterization of funds as “actively“ managed. Such a label is misleading and a possible violation of federal anti-fraud laws in that it suggests a difference between actively managed funds and comparable index funds, while knowing that the “actively” managed funds in question actually have a high correlation of returns to said index funds, while nevertheless charging significantly higher fees and costs than the index funds.

The Second Domino – Increased 401(k) Litigation
If I am correct with regard to my prediction that in most cases plans will not be able to carry their burden of proof regarding causation, it is reasonable to assume that the ERISA plaintiffs’ bar will realize this as well. As a result, it is reasonable to assume that there will justifiably be an increase in the number of 401(k) cases alleging a breach of a plan’s fiduciary duties.

This may, and should, result in more plans hiring ERISA attorneys and other experienced ERISA consultants to conduct fiduciary audits and possibly re-design their plans, where necessary, in an attempt to reduce or eliminate any potential fiduciary liability exposure for both the plan and its fiduciaries going forward..

While such remedial actions can address potential future liability exposure, 401(k) actions allege fiduciary breaches that have already occurred. The applicable statute of limitations in ERISA-related action is three or six years, depending on the facts of the case. As a result, it is imperative that plans take a proactive position in managing their funds as soon as possible in order to minimize future liability exposure.

The Third Domino – Increased Litigation Against Plan Advisers for Bad Advice
Plan advisers often present plans with an advisory contract that contains terms that attempt to disclaim any fiduciary liability for the plan adviser for any advice/ recommendations provided to a plan, arguably leaving the plan and its fiduciaries totally liable for any bad advice provided by the plan adviser.

When 401(k) fiduciary breach actions are filed against a 401(k) or 403(b) plan, many plans learn of the advisory contract’s fiduciary disclaimer provision and mistakenly believe that they have no recourse against the plan adviser and their firm. Fortunately, that is not necessarily true. When justified, plans can often attempt to negate such fiduciary disclaimer clauses by pursuing potential common law claims such as fraud, negligence,  and/or breach of contract.

In one of the leading cases upholding such common law claims, the court explained that

“Examining the nature of the suit at issue here, [plaintiff’s] state law negligence claims do not arise from the administration of the plan itself, or the provision of any plan benefits. Likewise, the suit does not involve parties whose relationships are governed by ERISA, such as relations among the plan’s beneficiaries, administrators, or fiduciaries. In short, [plaintiff’s] state claims have nothing to do with the operation of the plan itself. Accordingly, [plaintiff’s] claims [must be allowed to go forward] because they do not relate to an ERISA plan.32 (citations omitted)

Whenever I receive a call from a plan dealing with an advisory contract containing a fiduciary disclaimer clause, I quickly inform that under Section 205 of the Restatement of Contract, implicit in every contract is a duty of fair dealing. Knowingly or negligently providing bad advice, such as recommending cost-inefficient actively managed mutual funds, is not “fair dealing. If the plan adviser is a stockbroker or registered investment adviser, the regulatory bodies that oversee such firms also have similar “fair dealing” and/or “best interest” requirements which may apply to such claims.

Plans and plan fiduciaries should check their plan advisory contracts to determine if the contract includes any fiduciary disclaimer clauses. The clauses are usually buried in the contract, hoping that most plan sponsors will not read that far into the contract , if at all. Fiduciary disclaimer clauses will usually include language along the lines of (1) that the parties mutually acknowledge and agree that the plan adviser is only providing advice/ recommendations and not acting in a fiduciary capacity, and (2) that the plan acknowledges and agrees that the plan has the ultimate responsibility for deciding whether or not to implement the plan adviser’s advice/recommendations.

If the plan is uncertain as to whether their plan has any fiduciary disclaimer clauses or any other questions regarding such clauses, the plan should consult an experienced ERISA attorney. I also recommend to my clients that they ask their plan adviser to document that the recommended funds are cost-efficient and the names of the benchmark funds used in the determining the cost-efficiency of each fund.

I also suggest that the plan ask the adviser to provide them with an AMVR analysis for each recommendation, based on a fund’s nominal numbers and the fund’s risk-adjusted return numbers and AER-adjusted costs. If the plan provider says they cannot, or are not allowed to provide such information, it often indicates that the adviser does not actually know if the funds are cost-efficient. Trust me, they do not know and, as referenced earlier herein,  studies have shown the the overwhelming majority of actively managed are not cost-efficient.

Going Forward
In my earlier post, I asked if Putnam Investments, LLC v. Brotherston could be a pivotal decision for the 401(k) and 403(b) industries. The question was based primarily on my experience with InvestSense’s two proprietary metrics, the Active Management Value Ratio™ and the InvestSense Quotient™. My experience with the metrics has corroborated the findings of various academic studies-that the overwhelming majority of actively managed mutual funds are not cost-efficient. Consequently, I do not believe that most 401(k) or 403(b) plans will be able to successfully carry their burden of proof in proving causation, that the plan’s investments did not cause any losses sustained by a plan’s participants.

Since ERISA requires that a 401(k) plan’s investments be prudent, both individually and with regard to the portfolio as a whole, and the Restatement states that the use or recommendation of a cost-inefficient actively managed fund constitutes a breach of fiduciary duties, plans must be proactive to carefully verify and document the cost-efficiency of their plans investment options to avoid potential fiduciary liability exposure.

On a sidenote for current and prospective plan advisers, I believe the Court of Appeals’ decision and discussion provides a blueprint for designing an effective marketing strategy incorporating the AMVR. As I mentioned earlier, I believe that most ERISA plans continue to choose cost-inefficient actively managed mutual funds as the primary investment options for their plans. Plan advisers and those considering becoming plan advisers can point to the developments in the Putnam case and use the AMVR to expose cost-inefficient actively managed mutual funds and solutions for same.

Some plan sponsors have told me that they have simply decided to adopt a plausible denial policy in the event that their plan is challenged in court. If the reader takes anything from this paper, let it be the phrase that is often quoted in ERISA decisions-

a pure heart and an empty heads are not good enough [to defeat a claim alleging a breach of one’s fiduciary duties.]33 (citations omitted)

Note: This post started out as the core for a law review article, which it still may become. I just believe that the case and the time element are too significant, which is why I posted the article. Hopefully the information provided herein makes up for the length.

Dedication: This post is dedicated to Bert Carmody, who championed the AMVR concept from the beginning. When my friend James Holland first notified me of the Solicitor General’s decision, the first thing I thought about was Bert.

I was introduced to Bert by two of our mutual friends, James Holland and Rick Canipe. Bert and I met for a “think tank” session at a local restaurant that lasted over two hours. I love legal theory and Bert loved both the legal theory and the technical expertise involved.

I had initially decided to pick up the tab, but changed my mind when Bert started drawing and taking notes on the restaurant’s linen napkins. When I quickly informed him that I was not paying for that, he laughed and signaled the waitress to come refresh our drinks, and started writing on another napkin. It was the beginning of a wonderful, albeit far too short, friendship.

Bert, James and Rick went different ways than I did with the incremental cost/incremental returns concept, each of us creating effective compliance screening metrics. Bert would have loved to see the First Circuit’s opinion and the Solicitor General’s amicus brief, as they justify all of the points made that day at the restaurant and validate both of the resulting metrics.

Bert passed away several years ago. I miss being able to bounce things off Bert, so now I pester poor James with my ideas and arguments. Pray for James Holland. I know I do.

1. Brotherston v. Putnam Investments, LLC, 907 F.3d 17 (1st Cir. 2018).
2. Amicus Brief of Solicitor General Noel Francisco (hereinafter “Amicus Brief”), available at https://bit.ly/2Yp00xt
3. Amicus Brief,  I>
4. Amicus Brief, 7
5. Amicus Brief, 8.
6. Amicus Brief, 10,
7. Amicus Brief, 11,
8. Amicus Brief, 11.
9. Amicus Brief, 12.
10. Brotherston v. Putnam Investments, LLC, 907 F.3d 17, 39 (1st Cir. 2018).
11. Langbein, John H. and Posner, Richard A., “Market Funds and Trust-Investments Law,” (1976), Faculty Scholarship Series Paper 498, http://digitalcommons.law.yale.edu/fss_papers/498.
12. Amicus Brief, 20.
13. Restatement (Third) Trusts, cmt. b (American Law Institute).
14. Restatement (Third) Trusts, cmt. f (American Law Institute).
15. Restatement (Third) Trusts, cmt. h(2) (American Law Institute).
16. Laurent Barras, Olivier Scaillet and Russ Wermers, False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas, 65 J. FINANCE 179, 181 (2010);
Charles D. Ellis, The Death of Active Investing, Financial Times,January 20, 2017, available online at https://www.ft.com/content/6b2d5490-d9bb-11e6-944b-eb37a6aa8e;  Philip Meyer-Braun, Mutual Fund Performance Through a Five-Factor Lens, Dimensional Fund Advisors, L.P., August 2016; Mark Carhart, On Persistence in Mutual Fund Performance,  Journal of Finance, Vol. 52, No. 1, 57-8 (1997).
17. Laurent Barras, Olivier Scaillet and Russ Wermers, supra.
18. Charles D. Ellis, supra.
19. Philip Meyer-Braun, supra.
20. Mark Carhart, supra
21. Malkiel, Burton  “A Random Walk Down Wall Street,” 11th Ed., (W.W. Norton & Co., 2016), 460.
22. Carhart, supra.
23. Roger M. Edelen, Richard B. Evans, and Gregory B. Kadlec, “Scale Effects in Mutual Fund Performance: The Role of Trading Costs,” available at http://www.ssrn.com/ abstract=951367
24. Charles D. Ellis, “Letter to the Grandkids: 12 Essential Investing Guidelines,”               available online athttps://www.forbes.com/sites/investor/2014/03/13/letter-to-the-grandkids-12-essential-investing-guidelines/#cd420613736c
25. Malkiel, Burton  “A Random Walk Down Wall Street,” 11th Ed., (W.W. Norton & Co., 2016), 460.
26. Restatement (Third) Trusts, cmts. f, h(2), and m (American Law Institute).
27. Ross M. Miller, Measuring the True Cost of Active Management by Mutual Funds, Journal of Investment Management, Vol. 5, No. 1, First Quarter 2007. Available at SSRN: https://ssrn.com/abstract=972173
28. https://www.morningstar.com/InvGlossary/r_squared_definition_what_is.aspx
29. https://bit.ly/367BIdJ
30. https://www.finra.org/rules-guidance/notices/12-25
31. https://www.finra.org/rules-guidance/rulebooks/finra-rules/2111
32. Berlin City Ford, Inc. v. Roberts Planning Group, 864 F. Supp. 292 (D.N.H. 1994)
33. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983)

© Copyright 2019 The Watkins Law Firm. All rights reserved.

This article is for informational purposes only, and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
This entry was posted in 401k, 401k compliance, 401k investments, 403b, 404c, 404c compliance, Active Management Value Ratio, AMVR, best interest, closet index funds, compliance, consumer protection, cost consciousness, cost efficient, cost-efficiency, ERISA, ERISA litigation, fiduciary compliance, fiduciary law, fiduciary liability, Fiduciary prudence, fiduciary standard, investment advisers, investments, pension plans, prudence, Reg BI, retirement plans, wealth management, wealth preservation and tagged , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.