Category Archives: ERISA Compliance

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.

Top 5 Reasons Why a Small Business Owner Should Care About ERISA

A good friend in the industry recently came to me with a question that every professional that deals with ERISA has heard 100 times. Why should a small business owner care about ERISA? The response below can hopefully be used to further the dialog.

 #1 – It’s Your Money Too. 

Retirement plans can be designed to benefit both the small business owner and the rank and file employees. In fact, it is commonplace for the small business owner that sponsors a retirement plan to accumulate the biggest account balance. Unfortunately, if the plan is paying unreasonable expenses, it is likely that the owner is paying the lion’s share. Questioning whether fees are reasonable, a specific requirement of ERISA, can enhance the small business owner’s accumulation possibilities as well as for the rank and file.

#2- You’re Personally Liable.

One thing is certain regarding any small business owner accused of fiduciary malfeasance: they quickly become familiar with ERISA Section 409. ERISA Section 409 is not the same as Formula 409, which disinfects and cleans. Instead, ERISA Section 409 can wipe out the financial security of a small business owner that fails to conduct themselves in the best interests of the plan participants, because ERISA Section 409 makes the small business owner personally liable to make good on their mistakes. Read: liability is not limited to business assets. This means the house, the car, and in some circumstances, the fiduciary has even had to cash out their own retirement account to make good on the losses they have caused.

 #3 – The Department of Labor (DOL) Doesn’t Care if You Have 10 Employees or 10,000.

The DOL is funded with tax dollars and thus can put as much work and effort into helping 10 employees recover losses due to fiduciary breaches as they can helping 10,000 employees. Evidence of the DOL’s activity on plans of all sizes can be found at http://www.dol.gov/ebsa/newsroom/fscpcp.html. Note the descriptions of the employers and the minimal amounts of money involved in these civil and criminal enforcements. Thus, the small business owner should understand that other small business owners just like them have felt the ramifications of violating ERISA. As Alexander Hamilton stated in the Federalist Papers No. 15, “If there be no penalty annexed to disobedience, the resolutions or commands which pretend to be laws will, in fact, amount to nothing more than advice or recommendation.”

#4 – It’s Easy to Comply if You Get the Right Help.

Complying with ERISA, while complicated, is not impossible as long as you have the right help. ERISA requires a plan sponsor to honestly and prudently self-assess their strengths and weaknesses and then hire qualified help where they lack expertise. Following ERISA means seeking qualified advisors by establishing a documented process that includes the right questions and verified evidence of an advisor’s claim of expertise. Securing the right advisor will help steer the average small business owner through the compliance gauntlet and position the small business owner to focus on what they do best…running their business.

#5 – Better Outcomes for You and Your Employees.

Having an ERISA compliant retirement plan should, in most outcomes, provide employees with a larger source of income later in life. Obviously, this is the very reason retirement plans exist. Consequently, if an employee recognizes this, it can increase loyalty and productivity. It can also allow employees to retire at a time when they are being paid the most in their careers and younger employees are looking to further their careers by moving up the food chain. Nothing will cause a younger work force to flee faster than if they think there is no room to grow.

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