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Focus Funds Draw (More) Fire


Schlichter Bogard & Denton LLP is back at it—filing suit against a $1.4 billion 401(k) plan’s choice of the Northern Trust Focus Funds.

The suit—filed in the U.S. District Court for the Eastern District of Pennsylvania by David B. Binder, Janet L. Brett, George Knebel, Todd A. Messner, and Deborah Shobe on behalf of behalf of the PPL Employee Savings Plan, PPL Deferred Savings Plan, PPL Employee Stock Ownership Plan, and the LG&E and KU Savings Plan—alleges 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.”

Now, it’s not the first suit to “target” the Focus Funds—it’s not even the first such suit filed by the Schlichter firm (see Another Suit Targets Target-Date Fund Choice). In fact, the allegations here are largely (if not totally) identical to that raised in the suit filed against Takeda Pharmaceuticals almost exactly a year ago.

The Suit

Here (Binder v. PPL Corp., E.D. Pa., No. 5:22-cv-00133, complaint 1/12/22)—as there—the plaintiffs claim that the Focus Funds “suffered from significant and ongoing quantitative deficiencies and managerial turnover resulting in massive underperformance relative to that of well-established, prudently managed, comparable target date funds that were available to the Plan.” Deficiencies that, the plaintiffs say “…a prudent fiduciary would have removed the Focus Funds and replaced them with a prudent investment alternative, which would have avoided millions of dollars in losses suffered by Plan participants who invested in these funds.”

The suit also hits “notes” familiar to all excessive fee litigation: that this “mega” plan failed to leverage its “tremendous bargaining power to demand lower fees to benefit participants and beneficiaries through its massive assets”; that they “selected and retained higher-cost investments of the Focus Funds when identically managed, yet lower-cost investments, were readily available”; and that they opted for underlying investments that were proprietary funds of Northern Trust. 

There are some unique attributes to the funds in question. The suit explains that the funds were launched in mid to late 2009—collective funds—“comprised primarily of index or passive strategies in the various asset classes utilized,” eventually offered in various share classes. As are many new funds, these funds were advertised as being “back-tested,” with hypothetical performance results generated through the application of quantitative models. The suit alleges that “diligent investment professionals do not make decisions on an investment based on back-tested or hypothetical performance histories,” but goes on to claim that these funds suffered a long string of underperformance, comparing them to the three-year history of allegedly comparable target-date fund offerings at Vanguard, TIAA-CREF and T. Rowe Price. 

The suit goes on the note that over time 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 prudence in selecting the Focus Funds.” Moreover, the suit claims that the funds had an extraordinary amount of turnover within the funds—as was also alleged in the Takeda suit.

The suit notes that, “despite mapping close to $550,000,000 to the Northern Trust Focus Funds and investing an additional $68,000,000 Plan assets in other Northern Trust investments at the time, Defendants selected the more expensive ‘L’ share class of the Focus Funds that charged participants 9 bps rather than the significantly lower-cost ‘J’ or ‘W’ class.” 

‘Red Flag’

And if that weren’t enough, the suit points to the departure in 2015 of “the chief designer and manager of the Focus Funds and the director of oversight and governance of the Focus Funds, Jim Danaher”—an event that the plaintiffs say was “a red flag that warrants close analysis and potential removal of the fund,” particularly, they argue in view of the “expansive responsibilities Mr. Danaher claimed to have over all aspects of the Focus Funds.” All in all, the plaintiffs allege that if the fiduciary defendants had been fulfilling their responsibilities, they would have removed the Focus Funds by the end of the first quarter of 2016. “Nevertheless, and in violation of Defendants’ fiduciary obligations to continuously monitor funds and remove imprudent ones, the Focus Funds remained in the Plan and continued to underperform prudent alternatives, causing substantial losses to the Plan and the participants who invested in the Focus Funds.

“By failing to act as a prudent and diligent investment professional, Defendants caused Plan participants to lose substantial retirement assets.” The suit claims that if they had removed them in favor of the Vanguard target date fund alternative, the TIAA target date alternative, of the T. Rowe option, participants would not have lost over $34 million, over $37 million or over $55 million of their retirement assets, respectively.

A recent ruling has questioned the notion that there is no difference between share classes, and at least one court has opined that having to retain a certain asset level in order to be eligible for those discounts is itself a differential. Perhaps anticipating that response, the suit notes that, “given that the Plan had well over $1 billion in assets at all relevant times, with over half a billion dollars in the Focus Funds and total of over $600 million invested with Northern Trust, the Plan had more than enough bargaining power to obtain the lowest-cost share class of each investment option in the Plan. To the extent the Plan did not meet an advertised minimum investment threshold for any of the lowest-cost institutional shares, the investment provider would have waived those requirements based on the Plan’s size if the Defendants had requested such a waiver.”

Ultimately, while there are some new angles here, this is almost a copy and paste from the Takeda suit. Will it be successful? We’ll have to wait and 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.