Recently, participants and former participants in some of the largest 401(k) plans in the US have sued plan fiduciaries claiming that the use of one of the largest target date funds, the BlackRock LifePath Funds, was imprudent, because those funds “underperformed” alleged “comparators.”
These sorts of fiduciary imprudence/TDF underperformance claims have emerged as a second major line of attack (after the attack on fund and recordkeeping fees that began in the early 2000s) by plaintiffs lawyers on 401(k) plan fiduciaries.
These lawsuits, in which plaintiffs are all represented by the same law firm, include claims against the plans of Black & Decker, Cisco Systems, Citigroup, Marsh & McLennan, and Microsoft. The complaints are very similar (and in large parts identical) and generally focus on the imprudence of investing in the BlackRock TDF. In this article, we are going to focus on the most recent filing, the complaint against Marsh & McLennan, filed August 4, 2022.
Marsh & McLennan complaint
Marsh & McLennan maintains a 401(k) plan for its employees. As of December 31, 2020, the Plan had around 32,200 participants and $5.92 billion in assets. As in the other cases, Marsh & McLennan’s plan includes in its fund menu, as the default investment TDF, the BlackRock LifePath Index Funds. As of December 31, 2020, about 17% of plan assets was invested in the BlackRock TDFs.
In their complaint against Marsh & McLennan and Marsh & McLennan plan fiduciaries, plaintiffs begin with some sweeping allegations:
The BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the Class Period, could not have supported an expectation by prudent fiduciaries that their retention in the Plan was justifiable.
A simple weighing of the merits and features of all other available TDFs at the beginning of the Class Period would have raised significant concerns for prudent fiduciaries and indicated that the BlackRock TDFs were not a suitable and prudent option for the Plan. In addition, any objective evaluation of the BlackRock TDFs would have resulted in the selection of a more consistent, better performing, and more appropriate TDF suite. Instead, as is currently in vogue, Defendants appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return. Had Defendants carried out their responsibilities in a single-minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it. (Emphasis added.)
As a factual basis for these claims, plaintiffs only cite the general underperformance of the BlackRock funds vs. the market’s other large providers.
In this regard, the complaint begins by identifying what plaintiffs believe is the correct set of comparators. The table below (lifted from the complaint) gives market share for BlackRock and the plaintiffs’ “comparator” funds.
Table: Market share of BlackRock and of TDF comparators
|Vanguard Target Retirement||36.4%|
|T. Rowe Price Retirement||10.7%|
|BlackRock LifePath Index||8.8%|
|American Funds Target Date Retirement||7.6%|
|Fidelity Freedom Index||4.6%|
The complaint then provides 15 pages of tables comparing the performance of the BlackRock TDF (and different age target allocations within each suite of funds) with these comparator funds for various periods (e.g., 3- and 5-year returns). This data shows that (generally and with exceptions) the BlackRock TDF did underperform these comparators.
To vs. through
As we have discussed, comparing target date fund performance is particularly difficult and problematic because of the multitude of variables that may affect it. Differing glidepaths. Differing asset allocation strategies. And differing asset classes. Choices with respect to which, while rational and prudent by themselves, may result in “underperformance” vs. an alleged “comparator” (with a different glidepath, asset allocation strategy, and different asset classes).
This problem is particularly acute with respect to BlackRock’s TDF, because it uses a “to” glidepath, while all the comparator funds use a “through” glidepath.
Plaintiffs provide the following description of this distinction:
TDF glidepaths are managed either “to” or “through” retirement. A “to retirement” glidepath generally assumes participants will withdraw their funds once they reach the presumed retirement age, or soon thereafter. The asset allocation of a “to retirement” TDF remains static once the retirement date is reached. A “through retirement” glidepath expects participants will remain invested after reaching retirement and gradually draw down on their funds. Accordingly, the terminal allocation of a “through” TDF is not reached until a predetermined number of years after the target date.
While none of these complaints goes so far as to claim that “to” glidepaths are inherently imprudent, plaintiffs lean into criticism of them:
TDFs designed to take investors to retirement typically de-risk faster than their “through” peers, and while this may offer greater potential protection against downside risk, it leaves investors exposed to the potentially destructive, lasting consequences of running out of money in retirement. As retirees trend toward keeping savings in their retirement plans post-retirement, “through” glidepaths have been more widely utilized. Indeed, of the 28 TDF suites launched in the past decade which remain active, nearly 80% adopt a “through” approach.
One might expect, since a “to” glidepath is generally understood to be more conservative, in a long run bull market it would “underperform” a “through” glidepath. And that that fact, rather than imprudence, might better explain the alleged underperformance against an entirely “through” comparator group.
Plaintiffs try to anticipate and counter this obvious criticism of their logic by arguing (contra the above criticism of “through” glidepaths generally) that the BlackRock glidepath is in many cases – if you take “equities” as standing for risky and “bonds” as standing for “conservative” – riskier than the glidepaths of the comparator funds. While still underperforming those other funds. One would want to see more specifics on this before believing this claim.
Can these cases survive a motion to dismiss?
Obviously, anything can happen. In Pizarro v. The Home Depot, a US District Court for the Northern District of Georgia denied a motion to dismiss on pretty similar facts.
But, it could be argued that investment in a fund with $290 billion in assets ought to be assumed to be prudent – unless you can prove that all those other investors are also imprudent. Which sort of calls into question your concept of prudence.
And, courts – even those favoring plaintiffs – do not seem to be prepared to allow an imprudence-based-on-underperformance claim to proceed simply on the basis of a retrospective demonstration of “comparative” underperformance. They usually require a showing of some other “red flags.”
In this regard, in Smith v. CommonSpirit Health, et al. (June 2022), the Sixth Circuit, in upholding the dismissal of plaintiffs’ underperformance claim, stated:
Nor does a showing of imprudence come down to simply pointing to a fund with better performance …. [T]hese claims require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.
Finally, CommonSpirit is also instructive on the issue of comparisons, emphasizing that it is inappropriate to compare funds with “distinct objectives.” One would think that a “to” TDF has a pretty obviously distinct objective from a “through” TDF.
No safe place
To repeat what we have now said several times with respect to these lawsuits: This is an evolving area of the law. This litigation is not going away anytime soon. Different courts are reaching different results.
The situation of a sponsor and of sponsor fiduciaries, in this context, is difficult. They will want to consult with counsel and consider whether there are any actions they can take that will reduce risk.
The sustained bull market in US equities has made one sort of fund/asset allocation strategy look “good” and made others look “bad.” Different market conditions may reverse that outcome.
In other words, these are markets, the future is uncertain, and – where sponsor fiduciaries can be sued for (often marginal) fund underperformance – there is no safe place.
Note the language of the complaint, as justification for these lawsuits: “Instead, as is currently in vogue, Defendants appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return.” In these cases the defendants are being sued for pursuing a low-fee strategy – a strategy that some have thought would protect them against fiduciary litigation.
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We will continue to follow these issues.