The law firm of Schlichter Bogard & Denton has a new target—with some familiar accusations.
This time (Mills v. Molina Healthcare, Inc., C.D. Cal., No. 2:22-cv-01813, complaint 3/18/22) they are representing plaintiffs Michelle Mills, Coy Sarell, Chad Westover, Brent Aleshire, Barbara Kershner, Paula Schaub, and Jennifer Silva, “individually and as representatives of a class of participants and beneficiaries of the Molina Salary Savings Plan.” Molina Healthcare, Inc., headquartered in Long Beach, CA, provides managed health care services under Medicaid and Medicare programs and through state insurance programs.
The $741 million, 15,686 participant plan is accused primarily of causing the plan to invest in flexPATH’s “untested target date funds, which replaced established and well-performing target date funds used by participants to meet their retirement needs.” The plan fiduciaries are also alleged to have “failed to use the Plan’s bargaining power to obtain reasonable investment management fees, which caused unreasonable expenses to be charged to the Plan.”
Now, it’s not the first time that Schlichter’s clients have allegedly been ill served by use of the flexPATH funds, including the holding by a MEP earlier this year. Here, as there, the suit claims that flexPATH had limited experience managing assets when the flexPATH Index target date funds were first added to the Plan in May 2016, was not registered as an investment adviser with the SEC until February 2015 and did not begin managing assets until June 2015. “Shortly thereafter, flexPATH launched the flexPATH Index target date funds in December 2015 (for the Aggressive and Conservative funds) and January 2016 (for the Moderate funds). Accordingly, the full suite of the flexPATH Index target date funds did not exist until January 2016.”
That said, the suit continues that “when the flexPATH target date funds were launched, their target date fund management style had never been used in any target date fund solution offered in the marketplace,” and that “the novel and untested target date fund management style combined index or passive management strategies with multiple glidepaths.”
Layered Funds
Those arguments aside, the suit notes that “flexPATH did not actually invest the flexPATH target date funds’ underlying assets,” but utilized a “fund of funds” structure for the target date funds. “Because flexPATH invested the underlying assets of the flexPATH Index target date funds in BlackRock target date funds, additional fees were charged compared to the fees that would have been charged to investors had they invested directly in BlackRock’s funds.” The suit claims that the BlackRock LifePath Index target date funds charge 8 bps, while flexPATH charged Plan participants 26 bps. “This resulted in an additional 18 bps—225% more—to invest in flexPATH’s version of the target date funds.”
The flexPATH funds replaced the Vanguard Target Retirement TDFs in May 2016, noting that the “decision to add the flexPATH Index target date funds to the Plan resulted in over $210 million of the Plan’s assets (or 45% of the Plan’s total assets) being transferred to the flexPATH Index target date funds during 2016”—which increased to over $360 million (or 57% of the Plan’s assets) as of Dec. 31, 2019. The suit notes that 40% to 58% of the Plan’s total assets were invested in target date funds between 2015 and 2020.
‘Novel and Untested’
The plaintiffs argue that Molina added the flexPATH Index target date funds to the Plan “even though their target date fund management style had never been used in any target date fund offered in a 401(k) plan.” Moreover, they argue that the “novel and untested management style of the flexPATH Index target date funds was magnified by the inexperience of the funds’ investment manager (flexPATH), which had no established track record as an investment manager, had only managed assets for investors since June 2015, and only recently completed the launch of the flexPATH Index target date funds in January 2016.” Indeed, the suit claims that when the funds were added to the plan, “those funds had only been in existence for a few months. As a result, there was not even two quarters of actual performance history for Molina to consider when evaluating how the flexPATH Index target date funds performed under actual market conditions.”
The suit asserts that “a prudent and loyal fiduciary would not have recommended or selected the flexPATH Index target date funds without a five-year performance history to assess the investment manager’s ability to provide superior long-term investment returns relative to prudent alternatives available to the Plan.” It goes on to claim that, “given the lack of any meaningful performance history to evaluate the flexPATH Index target date funds relative to prudent alternatives available to the Plan, Molina could not conduct an independent investigation into the merits of adding the flexPATH Index target date funds. Nor could Molina conduct an independent investigation to determine whether flexPATH was sufficiently capable of managing the Plan’s assets through an untested investment strategy.” It goes on to state that the “inadequate track record” and the “untested target date fund strategy” would have been apparent to any prudent and loyal fiduciary, and would not be considered at the outset for inclusion in the Plan, particularly in light of the established and well-performing target date funds provided in the Plan.
The plaintiffs argue that in using the flexPATH Index target date funds, “the foregoing facts demonstrate that Molina breached its fiduciary duty by failing to “balance the relevant factors and make a reasoned decision” that using the flexPATH Index target date funds was prudent or in the best interest of the Plan’s participants.” Rather, the plaintiffs argue that the flexPATH Index target date funds “were managed by an inexperienced investment manager under a novel and untested target date fund investment strategy,” and that “Molina simply failed to determine whether participants would be better served by other prudent and better performing passively managed alternatives available to the Plan after considering all relevant factors.”
‘Under’ Whelmed?
The suit also claims that after flexPATH Index target date funds were included in the Plan, they not only underperformed other established target date funds available in the marketplace, “despite the inferior performance of the flexPATH Index target date funds, Molina maintained these funds in the Plan for years”—only removing them (in favor of the Fidelity Freedom Index series) in late 2020.
The suit notes that “relative to the Trust Select Shares at the time the funds were added to the Plan, the flexPATH Index target date funds (I1 shares) charged 420% higher expenses—26 bps compared to 5 bps,” and that “compared to the Plan’s Vanguard target date mutual funds, the flexPATH Index target date funds were close to 50% more expensive—26 bps compared to 16–18 bps.” The suit concludes that the plan later transitioned to Mshares for the flexPATH Index target date funds at or around December 2018—at which point “these shares were still more than twice the cost of the Vanguard collective trusts—12 bps compared to 5 bps.” Indeed, the plaintiffs noted that “had Molina used the Vanguard alternative rather than the flexPATH Index target date funds, Plan participants would not have lost in excess of $12.9 million of their retirement savings.”
Now, if the suit was largely dedicated to criticizing the selection and retention of the flexPATH funds, that was not the only issue; the plaintiffs argue that Molina also maintained a number of mutual fund investments in “higher-cost shares than were otherwise available to the Plan for the identical investment.”
Will the court be persuaded? We shall see.
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.
