Administration March 8, 2012

Target-Date Funds Lag Benchmarks

March 8, 2012 (PLANSPONSOR.com) - The latest S&P Target Date Scorecard indicates that further-dated target-date funds are continuing to generally have lower cross-sectional ranges of equity exposure than closer-dated funds, though not by large margins.
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This is consistent with past observations, and is evidence of a variety of philosophies surrounding the appropriate level of equity risk—particularly as target dates approach.

According to the report, in the one-and five-year periods ending December 31, 2011, the average returns of further-dated target-date funds generally lagged the benchmarks.

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For example, S&P data showed 80.8% of target-date 2010 funds were outperformed by the S&P benchmark over a one-year period. However, 85.7%, 84.6% and 89.0%, respectively, of target-date 2035, 2040 and 2040+ funds were outperformed by the S&P benchmark.

On average, target-date 2010 funds saw a one-year return of 1.30%, while the S&P benchmark had a one-year return of 2.87%. For target-date 2035 funds, the return was -3.12%, compared to the benchmark return of -1.46%. For 2040 funds, the returns were -3.45% and 1.93%, respectively.

This was primarily because as the markets turned around in March 2009, active funds were overweight with equities relative to the S&P Target Date Index. Asset-weighted average returns for the funds in each category were somewhat higher than equal-weighted returns, indicating that the larger target-date funds earned somewhat higher returns compared with their smaller counterparts.

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Compliance March 8, 2012

Court Dismisses Claims of Improper Investment Selection

March 8, 2012 (PLANSPONSOR.com) – A federal court dismissed a 401(k) plan participant’s claims that plan fiduciaries inappropriately selected plan funds and allowed excessive fees.
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The U.S. District Court for the Southern District of New York found that Bruce Laboy’s claim of inappropriate selection of the plan’s default fund was time barred, and that Laboy failed to specifically allege that other plan investments underperformed or to compare their performance to any comparable funds. U.S. District Judge Harold Baer, Jr. said Laboy failed to state a claim that either the default fund or the alternative funds were imprudently selected or monitored.  

According to the opinion, Laboy’s claim of excessive fees for the funds also fails. Even among Laboy’s handpicked group of funds, the fees charged by the default fund are not outliers: one fund has higher management fees, a second has identical management fees, with the remaining six funds charging fees that are lower by varying amounts, the court found. Laboy also failed to allege facts indicating that the default fund fees were excessive in light of the services rendered, and as to the other funds, Laboy failed to provide any evidence of their expenses at all.   

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Baer noted that decisions in which courts have allowed allegations of imprudence to go forward rested on allegations that the defendants selected certain funds out of self-interest or demonstrated clear incompetence. In the present case there is no similar allegation that defendants chose funds with high fees based on affiliation with the defendants or the plan sponsors.   

Though he dismissed the claims, Baer granted Laboy leave to amend the complaint within 30 days. 

According to the opinion, Local 32BJ is a union with more than 120,000 members within the Service Employees International Union. After a qualifying period, members of 32BJ are eligible to participate in a defined contribution 401(k) plan. Putnam Investments provided investment services to plan participants from January 1, 2001, until June 2011. Participants had the option of self-directing investments among 14 alternative funds or allowing their funds to be invested in the default fund, Putnam Asset Allocation: Conservative Portfolio.  

The opinion in Laboy v. Board of Trustees of Building Service 32BJ SRSP is here.

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