The U.S. Supreme Court has denied review of a case in which Putnam Investments was accused of engaging in self-dealing by including high-expense, underperforming proprietary funds in its own 401(k) plan.

Putnam had asked the high court to weigh in on whether the plaintiff or the defendant bears the burden of proof on loss causation under Employee Retirement Income Security Act (ERISA) Section 409(a). Putnam also asked the court to determine “whether, as the First Circuit concluded, showing that particular investment options did not perform as well as a set of index funds selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish ‘losses to the plan.’”

The U.S. District Court for the District of Massachusetts, in 2018, ruled for Putnam. Among other things, U.S. District Judge William Young of the U.S. District Court for the District of Massachusetts found the comparison of the Putnam mutual funds’ average fees to Vanguard passively managed index funds’ average fees flawed. Vanguard is a low-cost mutual fund provider operating index funds “at-cost.” Putnam mutual funds operate for profit and include both index and actively managed investments. Young said the expert’s analysis “thus compares apples and oranges.”

However, “finding several errors of law in the district court’s rulings,” the 1st U.S. Circuit Court of Appeals vacated the District Court’s judgment in part and remanded the case for further proceedings. In its opinion, the Appellate Court said “we 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.”

The Supreme Court’s denial of Putnam’s petition for writ of certiorari will leave these questions unanswered, and Putnam will now have to defend itself in the lower courts.

Previously, in an amicus curiae brief, the Investment Company Institute argued that shifting the burden of proving causation, or the lack thereof, from the plaintiff to the fiduciary ignores the ordinary default rule and the plain language of ERISA specifying that fiduciaries are liable for “losses to the plan resulting from” a fiduciary breach. “The ruling will inevitably adversely skew fiduciaries’ selection decisions. Congress directed fiduciaries to make investment option selections in the best interests of participants. Participants’ best interests vary based on many factors, including individual needs (e.g., age, marital and family status, other financial resources, risk appetite, and other factors) and the marketplace, so fiduciaries typically make available to plan participants a wide range of options. The ruling gives fiduciaries greater—and potentially overwhelming—incentives to make choices driven by the threat of litigation based on a single point of reference (i.e., index funds), rather than simply by what plan participants’ best interests dictate,” the brief says.

It also argued that allowing plaintiffs in ERISA fiduciary-breach cases to meet the loss causation element of a fiduciary breach claim solely by comparison to an index-fund-only hypothetical ignores the differences between actively managed investments and index funds as well as their differing benefits for participants while assuming that, as a per se matter, a prudent fiduciary would necessarily substitute passively managed funds for active ones no matter the circumstances.

ICI said letting the Appellate Court decision in the case stand will increase ERISA litigation, distort retirement plan fiduciary decisionmaking and ultimately harm plan participants.