Recent TDF Performance Lawsuits Raise Insurer Ire

Over the course of the past several weeks, the law firm Miller Shah has filed a series of Employee Retirement Income Security Act lawsuits against well-known national employers across the U.S., including the likes of Citigroup, Stanley Black & Decker, Booz Allen, Capital One, Wintrust, Cisco and Genworth.

The lawsuits all include substantially similar ERISA fiduciary breach allegations against the defendants, but the allegations in the suits are in fact unique relative to the broader landscape of ERISA litigation. In most cases filed previously, the defendants are accused of permitting participants to pay excessive fees and of failing to utilize their bargaining power to secure cheaper share classes and lower recordkeeping expenses. The new suits, on the other hand, focus on alleged underperformance of the plans’ target-date funds.

As one can see in the Booz Allen complaint, the fiduciaries facing these lawsuits all offer the BlackRock LifePath Index Funds, a suite of ten passively managed targe-date funds. According to the plaintiffs in the various cases, 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.”

In response to the emergence of these lawsuits, Daniel Aronowitz, managing principal of the fiduciary insurance firm Euclid Fiduciary, sent written commentary to PLANSPONSOR, arguing in no uncertain terms that the latest lawsuits are “the most outrageous of all of the excessive fee/investment underperformance cases that have ever been filed.” Aronowitz also shared a link to a lengthier blog post he has penned about the Miller Shah suits.

“It is one thing for plaintiff law firms to challenge the prudence of retail share classes for target-date funds, but it is quite another to challenge the performance of leading target-date suites,” Aronowitz writes. “If Miller Shah is allowed to profit by alleging that plan fiduciaries committed malpractice by selecting the highly rated, low-cost BlackRock target-date funds, then every fiduciary in America is at risk of being accused of malpractice if they serve on a retirement plan. In other words, if the BlackRock target-date funds can be challenged, then every investment selection can be challenged.”

Aronowitz in fact suggests that this may be what plaintiff firms want.

“But that is not what Congress intended in ERISA, and not what the Department of Labor, which has been largely absent from the debate on the merits of excessive fee and investment underperformance lawsuits, should allow,” Aronowitz writes. “Whatever merit some of the initial excessive fee and imprudence cases might have had, that has been perverted by the lawsuits challenging the performance of the #1-rated target-date funds in America.”

Aronowitz’s criticism continues: “Miller Shah is essentially claiming that the plan fiduciaries of all of these low-fee, high quality plans have committed fiduciary malpractice by choosing the top Morningstar rated TDFs. Taken to its logical conclusion, they are taking the position that the entire $280 billion invested in the BlackRock TDFs represent imprudent investment choices. It is a brazen claim of fiduciary imprudence.”

As Aronowitz points out, the BlackRock TDFs have been highly (and independently) rated by Morningstar for many years. Aronowitz says this is because they have “excellent processes and people, and they have delivered good results with a strategy that is designed to hedge against the type of market downturn that we are currently experiencing.”

“These cases essentially claim that you owe hundreds of millions of dollars if you do not deliver the top performance in the market, but that is not the fiduciary standard under ERISA,” he writes. “Miller Shah is attempting to compare BlackRock TDFs against plans that are not fair comparisons, because they have different objectives. These cases represent defamation of BlackRock and its talented team of investment managers.”

Aronowitz likens these cases to a series of earlier cases that have attempted to claim that the actively managed Fidelity Freedom TDFs have experienced deficient investment performance.

“Miller Shah is now claiming—equally without merit—that BlackRock funds have performed poorly. But their purported comparisons are misleading in four different ways, beyond that fact that Morningstar rates the BlackRock funds as the best target-date fund series in the market,” Aronowitz writes. “First, the BlackRock TDFs are being compared to more aggressive ‘through’ retirement TDF suites with higher equity allocations closer to retirement. Second, they are being compared to active target-date funds with different strategies. Next, they are being unfairly compared to two of the highest performing TDFs series in the last ten years. And finally, the BlackRock TDFs will almost always lag the highest performing funds in long bull markets against purported comparator funds … but BlackRock TDFs will outperform in down markets like the current 2022 bear market, as they did in the short downturn in the first quarter of 2020.”

Miller Shah has not yet responded to a request for comment about the criticism of their lawsuits.