Use of Proprietary Target-Date Suite Challenged in ERISA Suit

Northern Trust is the latest financial services company to face an Employee Retirement Income Security Act (ERISA) legal challenge, this one filed in the U.S. District Court for the Northern District of Illinois, Eastern Division.

The plaintiff in the case was an employee of Northern Trust. The suit states that the defendants, which include the Northern Trust Co. itself as well as its retirement plan committee, “failed to regularly monitor plan investments and remove ones that became imprudent.” The lawsuit further alleges that the defendants “loaded the plan” with poorly performing proprietary funds, called the Northern Trust Focus Target Retirement Trusts, and then kept these funds on the plan’s investment menu throughout the class period, despite their continued underperformance.

Many similar ERISA lawsuits have been filed against financial services providers in the past several years, and the results have been mixed. Some cases have delivered complex but potentially instructive rulings that have in turns favored plaintiffs and defendants, while others have ended with sizable settlements from which broader legal conclusions cannot reliably be derived. Northern Trust has not yet responded to a request for comment on the new lawsuit.

“Despite a market flush with better-performing alternatives, defendants selected the Northern Trust Focus Funds to be the plan’s target-date asset class investment option,” the lawsuit claims. “The Northern Trust Focus Funds have significantly underperformed their benchmark indices and comparable target-date funds since Northern Trust launched them in 2010. For nearly a decade, the Northern Trust Focus Funds have performed worse than 70% to 90% of peer funds. Still, defendants refuse to remove the Northern Trust Focus Funds from the plan’s menu of retirement investment options.”

According to the complaint, which covers a class period of November 2, 2014, to December 31, 2019, the defendants selected the Northern Trust Focus Funds as the plan’s qualified default investment option.

“Defendants’ disloyal and imprudent decision to keep offering the Northern Trust Focus Funds in the plan has had a large and tangible impact on plan participants’ retirement accounts,” the complaint states. “Based on an analysis of data compiled by Morningstar Inc., plaintiff projects the plan lost upward of $34 million in retirement savings since 2014 because of defendants’ decision to retain the Northern Trust Focus Funds in the plan, instead of removing them.”

The text of the complaint alleges that the Northern Trust Focus Funds are the only target-date retirement investing options in the plan. The plaintiff says this means participants in the plan who want to invest in a target-date strategy have no choices other than the Northern Trust Focus Funds.

“Since their inception in 2010, the Northern Trust Focus Funds have experienced nearly a decade of continuous underperformance,” the lawsuit states. “Still, defendants have failed to remove the Northern Trust Focus Funds from the plan. During the proposed class period here, defendants even added the Northern Trust 2060 Fund to the plan’s mix. A reasonable investigation by defendants would have revealed the Focus Funds’ chronic underperformance and prompted defendants to remove and replace them with superior options.”

The full text of the lawsuit is available here.