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Another Suit Targets Target-Date Fund Choice

Litigation

The target of a new 401(k) suit is familiar, as is the law firm representing the participant-plaintiffs—but the combination is new.

The plan “target” this time is the $1.8 billion 401(k) plan of Takeda Pharmaceuticals USA Inc., more specifically the fiduciaries of that plan and their selection—and retention—of Northern Trust’s Focus Funds on the plan’s investment menu.

The suit (Ford v. Takeda Pharms. USA, D. Mass., No. 1:21-cv-10090, complaint 1/19/21 U.S. District Court for the District of Massachusetts) claims that “instead of acting diligently and prudently, Defendants retained a suite of unproven collective investment trust target date funds as investment options in the Plan, known as the Northern Trust Focus Funds”—a target date suite that the plaintiffs—represented by Schlichter Bogard & Denton, LLP[i], by the way—that they claim “suffered from significant and ongoing quantitative deficiencies and turmoil resulting in massive underperformance relative to well-established, prudently managed, comparable target date funds that were available to the Plan.” They assert not only that “a prudent fiduciary would have removed the Focus Funds and replaced them with a prudent investment alternative,” but that doing so “…would have avoided millions of dollars in losses suffered by Plan participants who invested in these funds.”

Now, as is increasingly acknowledged in these suits, the plaintiffs state that they “do not have access to all of the material facts relating to the inner workings of fiduciary responsibility and management over the Plan and do not have access to Defendants’ actual decision-making process with respect to the exercising of fiduciary responsibility and management over the Plan, including the selection and retention of Plan investments.” 

Performance ‘Measurements’

That said, they assert that “a consistent performance history and investment strategy over a period of at least five years demonstrate the ability of the investment manager to generate consistently superior long-term investment results,” and that “diligent investment professionals monitor the performance of their selected target date funds using appropriate industry-recognized benchmarks and prudently managed equivalents.”

The suit then cites three alternative examples; target-date offerings by Vanguard, T. Rowe Price and TIAA-CREF, each of which they state has offered target date funds for more than 16 years. 

As for the target-date funds in question, the suit states they were launched in 2009, collective investment trusts, not mutual funds, and that they were “comprised primarily of index or passive strategies in the various asset classes utilized.” While any number of excessive fee suits have claimed that failing to select CITs or relying on active management were preferable alternatives, those weren’t at issue here. Rather, the suit says that the 2009 launch of the Focus Funds—which had no live performance history prior to that date—were promoted with “backtested” performance history—and while the practice isn’t exactly uncommon, the plaintiffs here allege that “diligent investment professionals do not make decisions on an investment based on back-tested or hypothetical performance histories.”

The Takeda plan chose those funds in 2010, transferring assets previously held in the actively managed Fidelity Freedom Funds,[ii] and then, according to the suit, “the Focus Funds immediately underperformed industry-accepted target date benchmarks for ‘Through’ target date funds used by investment professionals.” But then, the suit alleges, this underperformance continued year after year, and that “Notably, and for the first time as of 2013, the Focus Funds cumulated three years of performance history—all of which underperformed.”

‘Astonishingly High’ Turnover 

The suit goes on to note that while the Focus Funds invest exclusively in Northern Trust proprietary index funds, in 2013 Northern Trust changed 5 out of the 10 index funds in which the Focus Funds invest, “resulting in significant and material changes to the underlying assets and allocations of those assets.” These “significant changes, coupled with the persistent underperformance, should have been analyzed by Defendants as part of any diligent process in assessing the retention of the Focus Funds,” the suit claims. Moreover, this shift “created unusual transaction costs for funds of this nature and design”—indeed, the suit alleges that the average turnover for all of the funds in the Focus Fund series was 90%, which it notes is “astoundingly high”[iii] for any investment strategy, active or passive.

Instead, “based on all the above, given these significant changes to the funds and their persistent underperformance, and allowing sufficient time to make a fund replacement, by the end of the first quarter of 2015, if acting as a diligent and prudent investment professional, Defendants would have removed the Focus Funds,” the plaintiffs allege. However, it wasn’t until 2019 “…and only after substantial losses were incurred from Defendants failing to remove the Focus Funds, the Focus Funds were removed from the Plan.”

Alternative Outcomes?

As alternatives, the plaintiffs state (they say as “conservative” estimates) that if the plan had removed the Focus Funds and selected instead:

  • the Vanguard target date fund, plan participants would not have lost more than $22 million of their retirement assets; 
  • the TIAA target date fund alternative, plan participants would not have lost more than $32 million of their retirement assets; or 
  • the T. Rowe Price target date alternative, plan participants would not have lost more than $36 million of their retirement assets.

Ultimately, of course, the suit notes that “total plan losses will be determined at trial after complete discovery in this case and are continuing.”

‘Appoint’ Points

And lest we forget that the exposure stops with the plan fiduciaries themselves, the suit is also charging Takeda Pharmaceuticals USA with:

  • failing to monitor their appointees, to evaluate their performance, or to have a system in place for doing so, and standing idly by as the Plan suffered enormous losses as a result of their appointees’ imprudent actions and omissions with respect to the Plan;
  • failing to monitor their appointees’ fiduciary process, which would have alerted any prudent fiduciary to the potential breach because of the unreasonable fees and imprudent investment options in violation of ERISA;
  • failing to ensure that the monitored fiduciaries considered the ready availability of comparable and better performing investment options that charged significantly lower fees and expenses than the Plan’s investments; and
  • failing to remove appointees whose performance was inadequate in that they continued to allow unreasonable fees to be charged to Plan participants and imprudent investment options to be retained in the Plan, all to the detriment of Plan participants’ retirement savings.

Ultimately, it seems that we have here a new angle on a not-so-new target (multi-billion dollar plan) focusing on a relatively new target (target-date funds) by an “old” face from the plaintiffs’ bar. Based on prior experience, it won’t be the last.

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality. 


[i] Roughly 10% of the 42-page filing contains “press clippings”—largely a series of complimentary statements from a series of judges in a variety of jurisdictions commending the work and time commitment of Schlichter Bogard & Denton, LLP.

[ii] Which themselves have been the target of recent litigation, albeit on different grounds.

[iii] The suit claims that, as of 2010, the average turnover for all target date funds was only 23.5%.

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