Compliance October 26, 2021

Walgreen Co. Gets Rid of TDFs in Lawsuit Settlement

In addition to confirming the removal of challenged target-date funds, the defendants in the suit have agreed to a payment of $13.75 million.

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Plaintiffs in a lawsuit alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan breached their fiduciary duties by selecting and retaining poorly performing target-date funds (TDFs) for the plan have filed a motion for preliminary approval of a settlement agreement.

According to a memorandum of law supporting the motion, the defendants in the suit have agreed to pay $13.75 million into a settlement fund for a class of approximately 195,000 current and former participants of the plan. In addition, the settlement agreement requires the defendants to confirm the removal of the Northern Trust Focus Target Retirement Trusts from the plan and to, for a period of three years, use an investment adviser for ongoing plan investment monitoring. The memo says the TDFs have already been removed from the plan.

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Despite a market “teeming with better-performing alternatives,” the plaintiffs said in their complaint, Walgreen Co. selected the Northern Trust funds, which already had a history of poor performance. According to the complaint, they had significantly underperformed their benchmark indexes and comparable target-date funds from the time Northern Trust launched the funds in 2010. Northern Trust is not a defendant in the lawsuit.

In March 2020, Judge Charles Ronald Norgle of the U.S. District Court for the Northern District of Illinois declined to dismiss the lawsuit. Nagle cited previous cases which found “whether a particular investment choice was imprudent is a particularly fact-sensitive inquiry that would not be appropriate to resolve on a motion to dismiss,” and “[Employee Retirement Income Security Act] plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences.”

Data and Research October 25, 2021

Older Participants Are Increasing Exposure to TDFs

EBRI and ICI research finds the largest net movement toward target-date fund use over the period studied occurred among consistent 401(k) participants ages 40 and older.

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401(k) plan participants—especially those in older age cohorts—have been increasing their exposure to target-date funds (TDFs), according to a report from the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI).

EBRI and ICI compared year-end 2018 data and year-end 2010 data from the EBRI/ICI 401(k) database, which is constructed from millions of administrative records of 401(k) plans. It is a cross-section of the entire population of 401(k) plan participants and represents a wide range of participants—including those who are young and individuals who are new to their jobs, as well as older participants and those who have been with their current employers for many years.

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For this comparison, the firms looked at “consistent” 401(k) participants, or those who had accounts at the end of each year from 2010 through 2018; the firms say this removes the effect of participants and plans entering and leaving the database.

According to the analysis, at year-end 2010, 50% of consistent 401(k) participants held at least some TDF investments in their 401(k) accounts, and that share increased to 56.4% at year-end 2018. Seventy-seven percent of 401(k) plan participants in their 20s held TDFs in 2018. All age groups increased their exposure to target-date funds.

However, the largest net movement toward target-date fund use over the period occurred among consistent 401(k) participants in their 40s, 50s and 60s. Participants in their 20s had the highest use of TDFs in both periods, but experienced the smallest net change.

Sarah Holden, one of the authors of the perspective and ICI’s senior director of retirement and industry research, notes, “Target-date funds provide both age-appropriate investment diversification and rebalancing over time, and it is likely that increased use of target-date funds by these consistent older 401(k) participants reflects these retirement savers taking advantage of those features.”

Consistent 401(k) participants in their 60s moved toward a 100% concentration in target-date funds, on net: 15.1% of consistent 401(k) participants in their 60s had 100% of their 401(k) plan account invested in target-date funds at year-end 2010, compared with 16.5% at year-end 2018. Meanwhile, younger consistent 401(k) participants moved away from a 100% allocation, on net.

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