Another TDF Suite Draws Excessive Fee Suit

Plan fiduciaries’ decision to retain an actively managed target-date fund suite has drawn another excessive fee suit.

More specifically, the suit—filed against the $5.6 billion 401(k) plan of Quest Diagnostics Inc. by current participant William Morales[i]—claims that the “defendant’s failure to disclose the options for the lowest-cost share class available caused Plan participants to pay excessive fees when they chose the higher-cost share class for the same funds, which has and will continue to diminish the value of their individual 401(k) accounts.” The suit[ii] comments that the plan menu “consists largely of the Fidelity Freedom Active Suite of Funds (the ‘Active Suite’). The Active Suite offers thirteen target-date funds, which are actively managed funds that shift the fund’s asset allocation over time according to its ‘glide path.’”

“There is no good-faith explanation for utilizing a high-cost share class when a lower-cost share class is available for the exact same investment,” the suit states, going on to assert that “the Plan did not receive any additional services nor benefits based on its selection of more expensive share classes; the only consequence was higher costs for Plan participants.”

That said, the suit takes pains to acknowledge that the plaintiff here “is not arguing that Defendant had a duty to scour the market to find and offer any cheaper investment. Instead, Plaintiff alleges that simply that lower cost funds with the identical managers, investments styles, and stocks” should have been considered by the Plan, particularly as it relates to the thirteen (13) Fidelity Target Date Funds.”

The suit, filed in the U.S. District Court for the District of New Jersey (Morales v. Quest Diagnostics Inc., D.N.J., No. 2:23-cv-00118, complaint 1/10/23), acknowledges that Quest added lower-cost versions of the funds to the plan in 2016, but failed to transfer participants into those less-expensive options without their affirmative election.

To make its case, the suit provides a table of relative expense ratios for the funds, comparing that of the K Class shares (in which the plan was ostensibly invested) compared with an Institutional Premium Class shares of the same fund(s)—in which the plan was ostensibly eligible to invest. “In fact,” the suit notes, “more than sixty percent (60%) of the Plan’s investments are invested in the Fidelity Freedom Fund K Class Target Date funds which are, on average at least 55 basis higher than their less expensive Fidelity Freedom Index Fund Institutional Premium Class counterparts.”

The suit comments that the main difference between the two suites is that “the Index Suite includes only Fidelity mutual funds that track market indices, whereas the Active Suite invests predominantly in actively managed funds to try to outperform the market indices. Notably, each Suite’s glide path demonstrates both the Active and Index suites follow essentially the same strategy, given that each Suite’s allocation of equities versus bonds follows the same pattern,” it comments. But then the suit comments not only that “…the Active Suite charges more fees and has a higher expense ratio than the Index Suite,” but that “despite active management, the Active Suite has underperformed the index benchmarks. On the other hand, the Index Suite outperformed the Active Suite in four out of the six years beginning in 2014 and continuing through 2020.”

At a higher level, the plaintiff asserts that other investors have been voting with their feet, noting that “in 2018, the Suite experienced an estimated $5.4 billion in net outflows. In the four years prior to 2018, the Active Suite saw nearly $16 billion in total withdraws. At the same time, the Index Suite has seen significant inflows, receiving an estimated $4.9 billion.” The suit also notes that this particular Active Suite TDFS “have recently been the subject of many retirement plan class action lawsuits,[iii] for putting millions of savers on risky path to retirement” further demonstrating why a prudent fiduciary would remove such risky and costly funds from an investment lineup.”

We’ll see what the court has to say…

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.