Issues That Trigger a TDF Lawsuit
Art by Marc Rosenthal
Target-date funds (TDFs) were created, in part, to be a safe investment in 401(k) plans. But recently, a wave of lawsuits has crashed against some of those funds.
A settlement in a lawsuit accusing Franklin Templeton of self-dealing in its 401(k) plan requires it to add a nonproprietary TDF option to its investment lineup in addition to the plan’s qualified default investment alternative (QDIA)—the LifeSmart Target Date Funds.
More recently, a lawsuit was filed alleging that fiduciaries of the Walgreen Profit-Sharing Retirement Plan selected and kept in the plan TDFs that underperformed their benchmarks. Further, retirement plan fiduciaries at Intel were accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company’s custom TDFs.
On its website, litigation firm Cohen Milstein says it is investigating a number of issues concerning the selection and offering of TDFs. Below is what the firm notes it is looking for:
Improper investment strategy. “The actual investment strategy—e.g., the allocation between equities and bonds—may not be the same as the fund advertised. The fund may be pursuing a far riskier investment strategy than participants and plan sponsors are led to believe, even as plan participants near retirement.”
Excessive fees. “The fees charged by a target-date fund may not be justified by the performance of the investment. The fees for target-date funds can vary significantly, particularly depending on whether the fund’s fees are ‘layered’ or the underlying investments of the fund are actively or passively managed.”
Self-dealing or imprudent selection. “Many providers offer a wide variety of target-date funds. The fiduciary of the plan may have chosen the particular provider for improper reasons. For example, where the fiduciary of the plan or the employer sponsoring the plan markets a target-date fund, it improperly chose its own target-date funds without considering whether those funds are most appropriate for its own 401(k) plan participants.”
Improper default selection. Where a TDF suite is the plan’s QDIA, “the fiduciary of the plan has an obligation to ensure that the target-date fund was prudently, properly and appropriately selected.”