In a flurry of litigation activity not seen since 2016, several different 401(k) plans holding a target-date fund family despite “consistently deplorable performance” have been sued by participants represented by the same law firm.
The suits have been filed on behalf of participants in in the 401(k) plans of Citigroup Inc., Cisco Systems Inc., Genworth, Stanley Black & Decker Inc., Capital One Financial Corp., Booz Allen Hamilton Inc., and Wintrust Financial Corp.—all holders of the BlackRock[i] LifePath Index Funds. Representing the plaintiffs in each of these suits is the law firm of Miller Shah LLP—which recently targeted the Fidelity Freedom funds in a series of suits.
And while these suits have generally argued that the fund choices (including TDFs) were both underperforming andoverly expensive, this class of suits focuses solely on the former. Indeed, approximately half of the 47-page filing (in the case of the Cisco Systems suit,[ii] Bracalente v. Cisco Sys., Inc., N.D. Cal., No. 5:22-cv-04417, complaint filed 7/29/22) is taken up with charts and graphs making the case versus various competitors. At a high level, the suit alleges that “BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the Class Period, could not have supported an expectation by prudent fiduciaries that their retention in the Plan was justifiable.
“Defendants… could have chosen from a wide range of prudent alternative target date families offered by competing TDF providers, which are readily available in the marketplace, but elected to retain the BlackRock TDFs instead, an imprudent decision that has deprived Plan participants of significant growth in their retirement assets.”
More specifically, the suit claims that “…as is currently in vogue, Defendants appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return. Had Defendants carried out their responsibilities in a single-minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it. However, Defendants failed to act in the sole interest of Plan participants and breached their fiduciary duties by imprudently selecting, retaining, and failing to appropriately monitor the clearly inferior BlackRock TDFs.”
‘Fundamentally Irrational Decision-making’
Instead, the suit continues, the plan fiduciaries here “…employed a fundamentally irrational decision-making process (i.e., inconsistent with their duty of prudence) based upon basic economics and established investment theory, they clearly breached their fiduciary duties under ERISA—which are well-understood to be the ‘highest known to law.’”
Making matters worse (according to the suit), the fiduciaries had the temerity to designate these funds as the plan’s qualified default investment alternative (QDIA). “Given that the vast majority of Plan participants are not sophisticated investors, many, by default, concentrate their retirement assets in TDFs. As such, the impact of Defendants’ imprudent selection of TDFs is magnified vis-à-vis other asset categories,” the plaintiffs write.
The plaintiffs also find fault with the benchmark chosen to evaluate these TDFs. “Rather than demonstrate the success of the BlackRock TDFs in the broader TDF market, as, for example, can be achieved (and is commonly performed) by utilizing the S&P 500 Index to benchmark a domestic large cap equity fund, the BlackRock TDF custom benchmark merely reflects the managers’ ability to execute their own particular strategy.” The plaintiffs here suggest that there were plenty of better comparisons to be found among other industry competitive offerings.[iii]
‘Glide’ Paths
Pushing back a presumed argument, the plaintiffs comment that “any suggestion that such comparison is inappropriate because ‘to’ glide paths, like that of the BlackRock TDFs, adopt a more conservative approach is misleading. While the BlackRock TDFs de-risk at a quicker pace than most of the Comparator TDFs, the resulting equity allocation discrepancy is only reflected in its two most conservative vintages, the 2025 and Retirement TDFs. Indeed, the BlackRock TDF series has the industry’s most aggressive glide path for investors furthest from retirement and maintains a comparable equity allocation to its peers until an investor is approaching retirement.”
Ultimately, the plaintiffs allege that, “If Defendants had taken their fiduciary duties seriously during the Class Period, they would have replaced the BlackRock TDFs with a suitable alternative TDF. Their failure to do so caused Plan participants to miss out on substantial investment returns for their retirement savings.”
Lots to keep up with here—and, who knows—this might not be the end of this particular “wave.”
Stay tuned.
[i] BlackRock was also sued by a participant in its own 401(k) plan back in 2017, albeit on different grounds, but still involving the TDF suite.
[ii] The Citigroup filing is also 47 pages; WinTrust is 46 pages; and the Stanley, Black & Decker filing is 57 pages—mostly restating the same arguments.
[iii] Specifically excluded from these points of comparison were the Fidelity Freedom Funds, which, as noted above, have been targeted in similar litigation by the plaintiffs’ lawyers here. They explain in a footnote that those funds “do not represent an appropriate comparator,” because—at least in their estimation—“the Freedom Funds would have been an imprudent selection for the Plan for the duration of the Class Period due to myriad quantitative and qualitative red flags after undergoing a strategy overhaul in 2014.”
