Over Half of 401(k) Participants Have TDFs

A research paper shows that over half of participants with a 401(k) under Vanguard are invested in a target-date fund (TDF).

According to “Target-Date Fund Adoption in 2013,” 55% of all participants held a position in TDFs, and TDFs accounted for one-third of total plan contributions. In addition, 86% of 401(k) and other defined contribution (DC) plans at Vanguard offer a TDF.

The growing popularity of TDFs has affected the level of risk many participants take with their plan investments, according to the paper. For instance, in 2013, 23% of “do-it-yourself” investors held portfolios at either end of the equity risk spectrum. Ten percent held no equities, thus forgoing the potential return benefits of equities, and 13% held only equities, thus overexposing themselves to the higher risk associated with equities. Those figures contrast with the much riskier behavior seen 10 years ago in 401(k) plans, when 13% of participants held no equities and 22% were entirely invested in equities.

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“Target-date funds continue to reshape investment patterns in DC plans in fundamental ways. These funds provide appropriate levels of risk as a participant ages and a remedy to the problem of extreme asset allocations,” says Jean Young, author of the report and a senior analyst with the Vanguard Center for Retirement Research in Valley Forge, Pennsylvania. “For these reasons, we expect the adoption of TDFs to continue in the coming years.”

Thirty-one percent of all Vanguard participants held a single TDF in 2013, says Young, more than double the figure from five years earlier. Among participants entering the plan for the first time, two-thirds were invested in a single TDF.

The paper also shows that about half of TDF investors at Vanguard are considered “mixed investors,” meaning they hold a TDF in combination with other investments. In 2013, 46% of all TDF investors fell in this category. Of those, about half became mixed investors as a result of plan sponsor decisions, including employer contributions in company stock or other actions. The other half of mixed investors intentionally constructed a portfolio of both target-date and non-target-date strategies. Many of these participants are pursuing what appear to be reasonable diversification strategies, though they do not fit within the “all in one” portfolio approach of TDFs.

Although many participants choose to invest in TDFs on their own, the paper reveals that a major factor influencing the rise of these funds is their use as a default investment in automatic enrollment plans, in which companies sponsoring workplace retirement plans automatically put employees into their plans and invest their accounts in TDFs. By year-end 2013, 34% of Vanguard plans—covering nearly 60% of all participants—had adopted automatic enrollment, typically for participants newly eligible to take advantage of their plan.

Regardless of whether they use automatic enrollment, the paper shows that 81% of all Vanguard plans used a target-date or balanced fund as a default investment by the end of 2013.

More information about the paper is available here.

Participant’s Imprudent Funds Claims Time-Barred by ERISA

A federal appeals court has dismissed claims of a participant in Suntrust Bank’s 401(k) plan that the company engaged in “corporate self-dealing” at the expense of plan participants.

Barbara Fuller alleged the defendants in the case violated their Employee Retirement Income Security Act (ERISA) fiduciary duties of loyalty and prudence by selecting eight proprietary funds (referred to as the STI Classic Funds) that were more expensive and performed worse than other funds they could have included in the plan, and by repeatedly failing to remove or replace the funds. Although the 11th U.S. Circuit Court of Appeals disagreed with a district court’s dismissal of certain claims based on ERISA’s three-year statute of limitations, it found all the claims were time-barred by ERISA six-year statute of limitations.

It was found that Fuller lacked standing to bring any claim as to the STI International Fund because she never invested in that fund.

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The appellate court noted that for claims of fiduciary breaches under §1104(a)(1), ERISA provides that no action may be commenced “after the earlier of”: (1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.

The court found the documents attached to the defendants’ motion to dismiss did not show that Fuller had actual knowledge of the breach because defendants did not show that the documents were provided to Fuller or that she obtained knowledge of the facts in the documents from another source. All but one of the documents were dated after Fuller had cashed out her account. It was unclear whether the Plan Prospectus, which was dated August 1, 2005, was actually available to Fuller before her cashout date. “That the documents (or the relevant facts in the documents) were provided to [Fuller] is a necessary predicate to establishing the three-year bar,” the court said in its opinion.

For claims that the defendants breached their fiduciary duties by selecting the funds, the court found it clear those were time-barred by ERISA’s six-year statute of limitations since the funds were selected in April 2004. However, the court cited the 9th Circuit’s decision in Tibble v. Edison, in saying a new six-year limitations period under ERISA would begin where a plaintiff could “establish changed circumstances engendering a new breach” (see “9th Circuit Affirms Ruling in Retail Fund Dispute”). In Tibble, the court explained that “changed circumstances” could be shown where “significant changes in conditions occurred within the limitations period that should have prompted ‘a full due diligence review of the funds, equivalent to the diligence review [fiduciaries] conduct when adding new funds to the Plan.’”

But, the court found circumstances in the Fuller case were similar to a case from the 4th Circuit, David v. Alphin, in which a district court found the allegations relating to ongoing monitoring of funds were just restatements of allegations regarding the selection of funds (see “Case Sensitive: Long Standing?”). The 11th Circuit said Fuller’s allegations concerning the imprudent acts that allegedly occurred at the time the STI Classic Funds were selected and those that occurred thereafter are in all relevant respects identical. It concluded that Fuller’s complaint contains no factual allegation that would allow us to distinguish between the alleged imprudent acts occurring at selection from the alleged imprudent acts occurring thereafter.

“Thus, like the Fourth Circuit in David, we decline to decide whether the Committee Defendants had an ongoing duty to remove imprudent investment options from the Plan in the absence of a material change in circumstances… Accordingly, Fuller’s claims in Count 2 are time-barred by ERISA’s six-year period of limitations,” the appellate court concluded.

The 11th Circuit’s opinion in Fuller v. Suntrust Banks, Inc. is here.

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