Are target date funds really the next focus of ERISA litigation?

Much has been written about whether target date funds (“TDFs”) will be the next focus of ERISA litigation. For example, this article suggests that TDFs are potentially risky because (1) they may provide “advice” to participants, (2) the underlying investments may violate a plan’s investment policy statement, and (3) the glide path, or debt to equity ratio, can be improper. Another article addresses the debate over whether TDFs should be managed “to versus through” the target date. The increased focus is not a surprise considering that one survey suggests that 75% of responding plans offer a TDF.

In our personal experience, we have seen evidence that plan sponsors are not giving the subject enough attention. For example, after analyzing a family of TDFs added by one of our clients, we concluded that more than a handful of the TDFs’ underlying actively managed mutual funds had recently been removed as core funds from the plan for underperformance and other issues. Their re-arrival in the plan came as quite a surprise to the plan sponsor.

Of the cases in the ERISA Litigation Index, three have allegations specific to TDFs:

Tussey v. ABB, Inc.

In Tussey, the plan fiduciaries were found to have violated ERISA when they selected the Fidelity Freedom Funds because (1) they failed to employ a winnowing process, (2) the funds consistently underperformed, and (3) the funds were chosen to provide additional revenue sharing to Fidelity, which in turn benefited ABB by reducing the amount of hard dollar expenses it was required to reimburse. For a copy of the trial order, click here. As we’ve previously written about, this case is currently on appeal to the 8th Circuit Court of Appeals with response briefs to be filed by the plaintiffs this month.

Krueger v. Ameriprise Financial, Inc.

In Krueger, the plaintiffs have alleged that the plan’s fiduciaries added the RiverSource, later Columbia, family of TDFs purely for the benefit of Ameriprise, which owned the funds. They have alleged that (1) the plan fiduciaries used the plan to “seed” the funds when they were first created, (2) the funds had no performance history, (3) the funds had no Morningstar ratings, and (4) the funds were significantly more expensive than other established TDF families. For a copy of the latest amended complaint, click here. The allegations were also discussed in the district court’s denial of Ameriprise’s motion to dismiss.

Bilewicz v. FMR LLC (Fidelity Investments)

In this brand new case filed against Fidelity Investments by a participant in its in-house retirement plan, the complaint includes allegations regarding the Fidelity branded Freedom Funds. The plaintiffs allege that (1) the Freedom Funds exclusively invest in high cost Fidelity branded actively managed mutual funds rather than low cost index funds and (2) the plan fiduciaries could have invested in the Pyramis Lifecyle Index Funds, a lower cost index-based series of TFDs offered by Fidelity’s subsidiary that creates institutional products. For a copy of the complaint, click here.

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In light of all of this activity, the Department of Labor (“DOL”) has recently published informal guidance entitled “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries.” The DOL suggests an 8 step process for plan fiduciaries:

  1. Establish a process for comparing and selecting TDFs.
  2. Establish a process for the periodic review of selected TDFs.
  3. Understand the fund’s investments – the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time.
  4. Review the fund’s fees and investment expenses.
  5. Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan (for example, Blue Prairie Group, a respected RIA out of Chicago has had success in designing custom target date funds for their clients).
  6. Develop effective employee communications.
  7. Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection.
  8. Document the process.

(For full disclosure purposes, FRA/PlanTools was hired to build and maintain The Allianz Global Investors Target-Date Tool Set™ which addresses many of the steps indicated by the DOL. More information can be found here.)

In conclusion, we cannot say for certain whether additional cases will focus on TDFs, especially given the more unique allegations in the Tussey and Krueger cases. Nonetheless, our suggestion is to not become a test case (and the next entry in this blog). We advise our readers in the strongest sense to thoroughly read and implement the DOL’s Tip’s for Plan Fiduciaries.

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If you know of other cases that you would like tracked here, please email Tom at tclark@fraplantools.com.

Follow us on Twitter @PlanTools or subscribe via email to receive all future updates about these cases and others we are tracking on the ERISA Litigation Index. We will post information as soon as possible after it becomes available.

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