More TDF Underperformance Lawsuits Emerge Across US

Over the course of this summer, plaintiffs represented by the increasingly active law firm Miller Shah LLP have filed a cluster of new Employee Retirement Income Security Act lawsuits.

The defendants in the cases include well-known national employers across the U.S., including Citigroup, Stanley Black & Decker, Booz Allen, Capital One, Wintrust, Cisco and Genworth.

The lawsuits all include nearly identical ERISA fiduciary breach allegations against the defendants, but these allegations stand in sharp contrast 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.

Now, two new employers have been brought into the fray: Marsh & McLennan and Advance Publications. As in prior cases, the firms offer the BlackRock LifePath Index Funds, a suite of 10 passively managed target-date funds, as the default investments in their defined contribution retirement plans. According to the plaintiffs in the new cases, the BlackRock TDFs are “significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the proposed class period, could not have supported an expectation by prudent fiduciaries that their retention in the plan was justifiable.”

“Measured against appropriate, available alternative TDFs pursuant to the frameworks employed by prudent fiduciaries, the BlackRock TDFs are a vastly inferior retirement solution and could not have been justifiably retained in the plan,” the lawsuits state. “Throughout the class period, there were many TDF offerings that consistently and dramatically outperformed the BlackRock TDFs, providing investors with substantially more capital appreciation. Critically, at the time of defendants’ decisions to select and retain the BlackRock TDFs, those alternatives—unlike the BlackRock TDFs—supported a reasonable expectation of return to justify selection and retention in the plan.”

Echoing the prior suits nearly verbatim, the new complaints go on to allege that it is “apparent, given the continued presence of the BlackRock TDFs in the plan’s investment menu, that defendants failed to scrutinize the performance of the BlackRock TDFs against any of the more appropriate alternatives in the TDF marketplace in order to determine whether the expected performance of the BlackRock TDFs could support their continued retention in the plan.”

The complaints go on to allege that the plans’ investment in the BlackRock TDFs has resulted in participants “missing out on millions of dollars in retirement savings growth” that could have been achieved through an investment in alternative TDFs.

“Prudent fiduciaries evaluate TDF returns not only against an appropriate index or a broad group of all peer TDFs, but also against specific, readily investable alternatives to ensure that participants are benefitting from the current TDF offering,” the complaints state. “The managers of the BlackRock TDFs, like those of many TDF suites, have designed a custom benchmark against which their performance can be assessed. … Rather than demonstrate the success of the BlackRock TDFs in the broader TDF market, as, for example, can be achieved (and is commonly performed) by utilizing the S&P 500 Index to benchmark a domestic large cap equity fund, the BlackRock TDF custom benchmark merely reflects the managers’ ability to execute their own particular strategy. Thus, it is incumbent on plan fiduciaries and a component of the applicable standard of care throughout the class period to assess TDFs against readily available prudent alternatives to ensure that participants are best served by the options available to them.”

The complaints allege that the defendants failed to enact such an assessment prudently and loyally.

Neither Marsh & McLennan nor Advance Publishing have responded to a request for comment about the allegations.

While not named as a defendant in the suit, BlackRock provided the following statement regarding the glut of litigation: “BlackRock is widely recognized as a market leader in target-date funds, with a deep commitment to retirement investing research and a long history of engagement with defined contribution plan sponsors and their consultants. Our investment process takes into account multiple factors, including return objectives, market cycles, time horizon and risk management. As a result, BlackRock’s LifePath Index funds are highly regarded by many fiduciary decisionmakers and independent evaluators of investment products for delivering consistently strong outcomes for plan participants over time.”

Various other parties have offered comment to PLANSPONSOR about the emergence of these new lawsuits, including Daniel Aronowitz, managing principal of the fiduciary insurance firm Euclid Fiduciary. He suggests 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’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, independently rated by Morningstar for many years. 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,” Aronowitz says.

“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 adds. “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.”

Ron Surz, president of Target Date Solutions and author of “Baby Boomer Investing in the Perilous Decade of the 2020s,” observes that ERISA litigation seems to be moving beyond the singular issue of excessive investment and recordkeeping fees and into the realm of risk assessments and performance. As he argued previously in conversation with PLANSPONSOR, Surz believes many providers’ target-date fund suites actually carry excessive risk. This is a very different take compared with the Miller Shah lawsuits, he notes, but he believes this general change in focus is significant.

“I personally think Miller Shah has a very hard case to prove, but I like the new focus on something other than fees,” Surz says. “As you know, I believe that it will require lawsuits to remedy the excessive risk problem in TDFs.”

Surz agrees that the current litigation landscape, in which plan sponsors are being sued both for allegedly taking excessive risk and allegedly failing to take sufficient risk, puts them in a difficult bind.

“Plan sponsors are indeed in a hard place,” Surz says. “Risk is normally rewarded, and certainly has been over the past 13 years. That’s why the BlackRock lawsuits seem challenging to me—because the plaintiffs will have to deal with risk-adjusted performance. But here’s the real problem. TDFs are not [sufficiently] vetted.”

To underscore his point, Surz points back to the period of the Great Recession.

“In 2008, there was a public outcry to fix excessive TDF risk,” he says. “Back then, TDFs in 401(k)s were only several years old, and they only held about $200 billion. Today, there are multiple trillions of dollars invested in TDFs, and nearly 80 million Baby Boomers who are in the retirement risk zone, [meaning they are significantly exposed to sequence of returns risk]. All of those assets and people who are near retirement are exposed to 85% in risky assets today—with 50% or more in equities plus 35% in risky long-term bonds. Sure, this risk has performed well for a long time, and we should be happy for the luck. But that’s all it is—very good luck that should not be expected for much longer.”