Two former employees of Quanta Services in late September brought a class action suit against the company under the Employee Retirement Income Security Act, alleging that Quanta had maintained underperforming and expensive investment options in its sponsored retirement plan.
Quanta Services, an electrical power company, sponsored a retirement plan that covered 16,317 participants, with $1.21 billion in assets as of December 21, 2020, according to the lawsuit.
The lawsuit alleges that a plan of this size should have greater bargaining power to negotiate lower fees. The plan, however, kept high-cost and underperforming actively managed funds when better alternatives were available, such as passive index funds, according to the plaintiffs.
The suit preempts a common argument made by defendants in ERISA cases that the funds maintained by a sponsor cannot be fairly compared to higher-performing competitors because “competitors are not comparators.”
To address this “apples and oranges” problem, the lawsuit alleges that the point of actively managed funds is to outperform index funds in order to justify their higher cost. Their reason for existence is comparative: to grow faster than passive funds and justify their higher management cost. This makes them ripe for comparison, the lawsuit alleges, and their inclusion in a plan when better passive funds are available violates the fiduciary’s duty of prudence and duty to monitor on behalf of participants.
The plan sponsor did not compare active fund to index plans, however, and also kept an active target date fund as the plan’s “Qualified Default Investment Alternative” or QDIA. A QDIA is a default investment that a plan may offer as a recommendation to participants that lack the knowledge or confidence to select their own, and their assets would be invested in the QDIA if they do not select a fund themselves.
The plaintiffs allege that an active TDF should not have been the QDIA, since active funds typically underperform passive funds in the long run. To this end, the plaintiffs cited data showing that passive funds gained $40 billion in net inflows from 2016 to 2020, and active funds suffered $35 billion in net outflows over the same time period, reflecting a collective market endorsement of passive over active, according to the complaint. They also allege that actively managed funds tend to contain more high-risk assets such as high-yield bonds.
Specifically, the suit noted the American Beacon Small Cap Value Fund and the DFA International Small Cap Value Fund, both of which, according to the complaint, underperformed their own benchmarks for several consecutive quarters. Since Quanta did not remove these funds in a timely manner, it failed its duty to prudently monitor their retirement options, costing the plaintiffs and the class money in their total savings.
Quanta Services did not return a request for comment.