Passive TDF Performance Scrutinized in Latest String of ERISA Lawsuits

A new Employee Retirement Income Security Act lawsuit has been filed in the U.S. District Court for the Eastern District of Virginia, naming as defendants Booz Allen Hamilton Inc., the company’s board of trustees and various committees tasked with operating the management and technology consulting firm’s defined contribution retirement plan.

The complaint details the ERISA fiduciary duties and provides a general overview of the DC retirement plan marketplace in the U.S., especially the “mega” plan space in which the Booz Allen Hamilton plan operates, as it allegedly has more than $6 billion of participant assets invested. The complaint also includes an exposition about the differences between “to” retirement target-date funds and “through” retirement TDFs, citing Morningstar research to suggest that, of the 28 TDF suites launched in the past decade that remain active, nearly 80% have adopted a “through” approach.

According to the complaint, the plan lineup has, since March 2010, offered the BlackRock LifePath Index Funds, a suite of ten TDFs.

“The BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the class period, could not have supported an expectation by prudent fiduciaries that their retention in the plan was justifiable,” the complaint states. “Defendants were responsible for crafting the plan lineup and could have chosen from a wide range of prudent alternative target-date families offered by competing TDF providers, which are readily available in the marketplace, but elected to retain the BlackRock TDFs instead, an imprudent decision that has deprived plan participants of significant growth in their retirement assets.”

Very similar allegations have been leveled in lawsuits against plan fiduciaries at Cisco, Citigroup, Wintrust and Stanley Black & Decker.

The Booz Allen Hamilton complaint alleges that “a simple weighing of the merits and features of all other available TDFs at the beginning of the class period” would have raised significant concerns for prudent fiduciaries. (BlackRock, while the subject of much discussion in the text of the lawsuit, is not named as a defendant.)

“In addition, any objective evaluation of the BlackRock TDFs would have resulted in the selection of a more consistent, better performing, and more appropriate TDF suite,” the complaint alleges. “Instead, as is currently in vogue, defendants appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return. Had defendants carried out their responsibilities in a single-minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it.”

This argument is one aspect in which the ERISA lawsuit diverges from many that have been previously filed against large national employers. Whereas most of these cases argue that plan sponsors should have offered lower-fee funds, the argument here suggests that the plan sponsor defendants should have looked beyond fees.

“Since the fiduciaries here employed a fundamentally irrational decisionmaking process (i.e., inconsistent with their duty of prudence) based upon basic economics and established investment theory, they clearly breached their fiduciary duties under ERISA—which are well-understood to be the highest known to law,” the complaint states. “Exacerbating defendants’ imprudent decisions to add and retain the BlackRock TDFs is the suite’s designation as the plan’s qualified default investment alternative.”

The lawsuit also details BlackRock’s alleged investment methodology in the LifePath TDF suite, and suggests the TDFs are, in general, substantially more aggressive than many peer funds. Using a number of charts, it alleges that BlackRock’s performance has lagged that of other options, and that this should have triggered an investigation process and possible fund change on the part of the plan fiduciaries.

Booz Allen Hamilton has not yet responded to a request for comment about the complaint. The text of the lawsuit is available here.