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On January 10, 2025, the United States District Court for the Eastern District of Virginia, in Hanigan v. Bechtel, dismissed plaintiff’s claim that, in using a managed account as the plan’s qualified default investment alternative (“QDIA”), the sponsor fiduciary had violated ERISA’s fiduciary prudence standard.
Plaintiff had argued that, for the 65% of (defaulted) participants that did not provide any personalized information, “the [managed account] only considers ‘age and target retirement date/life expectancy,’" and (in effect) adds nothing to what might be accomplished with a TDF. In that context (that is, compared to a TDF), the Bechtel managed account’s annual fees were $458 higher than the average TDF fee and received “worse returns.” (“As an example, Hanigan describes that a T. Rowe Price TDF received [a] 7.47% return on investment for 5-years and 8.91% for 10-years. Meanwhile, the [Bechtel managed account] provided an average return of 6.50% for 5-years and 7.83% for 10-years.”)
In dismissing plaintiff’s claim, the court – applying the standard courts are applying in these sorts of cases (see, e.g., in Smith v. CommonSpirit Health, et al.(June 2022)) – held that a TDF was not an appropriate “comparator” to use to judge the fees and performance of a managed account. While a TDF generally only considers "age and target retirement date/life expectancy," the Bechtel managed account also took into account “risk tolerance; account balance; outside assets and pension wealth; gender; salary; savings rule; pension compensation; and social security income.”
The viability of managed accounts as QDIAs
The court’s decision supports the use of managed accounts – with distinct asset allocation factors in addition to target retirement date/life expectancy – as a default. We note, however, that some plaintiffs’ lawyers have targeted managed accounts/managed account fees (it was a feature of, e.g., the Home Depot litigation and of pay-to-play-related litigation, e.g., in Bugielski v. AT&T), and sponsors will want to consider supporting a decision to use managed accounts as a QDIA by documenting their consideration of a TDF alternative.
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We will continue to follow this issue.