Compliance

Fidelity Dismissed from Verizon Plan Investments Suit

Although the court dismissed claims regarding risky investments in TDFs and participant fee disclosure failures, Verizon still faces a charge regarding an underperforming investment.

By Rebecca Moore editors@strategic-i.com | October 03, 2017
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A federal court judge has dismissed claims against Verizon Communications retirement plan fiduciaries and Fidelity Investments over underlying investments in target-date funds (TDFs) and a lack of disclosures about revenue sharing in participant fee statements.

A participant in one of the Verizon retirement plans filed suit on her behalf as well as on behalf of participants in all of Verizon’s defined contribution (DC) plans, alleging Verizon created white label funds which include underlying funds and multiple layers of fess “that are nearly impossible for participant in Verizon’s plans to understand or evaluate.” The lawsuit specifically calls out target-date funds offered in the plans which include these white label funds as well as risky alternative investments.

The lawsuit alleges that all the TDFs underperformed low-fee, passively managed TDFs offered by Vanguard.

U.S. District Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York found the plaintiff’s claims to be insufficient. First, Gardephe noted that regarding TDFs, the Department of Labor (DOL) requires a plan to offer a “broad range of investment alternatives” that are “diversified” and have “materially different risk and return characteristics.” He also noted that a year after alternative investment funds were added to the TDFs, the rate of return for the TDF actually increased from 13.47% to 15.50%. According to Gardephe, asset allocations of TDFs are not required to take into account risk tolerances, investments or preferences of an individual participant.

In addition, according to the court opinion, while the plaintiff offered two charts labeled “Verizon vs. Vanguard Target Date Funds” and “Verizon vs. Custom Index Target Date Funds,” neither demonstrates Vanguard’s superior performance and none of the referenced Vanguard funds is a target-date fund.

Finally, Gardephe said, “Decisions in which courts have allowed allegations of imprudence to go forward rested on allegations that the defendants selected certain funds out of self-interest or demonstrated clear imcompetence.” Neither was alleged in the case, so the judge dismissed this claim.

NEXT: Allegations Regarding Fee Disclosures