Target Date Fund Performance Litigation ' Advice For Plan Fiduciaries

Published date18 February 2022
Subject MatterEmployment and HR, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
Law FirmSquire Patton Boggs LLP
AuthorMr Gregory J. Viviani and Caitlin Steiner

In recent years, there have been more than 150 lawsuits alleging violations of ERISA1 fiduciary obligations that are based on "excessive fees" being charged to participants in defined contribution retirement plans.

A more recent trend also seems to be focusing on the investment performance of target date funds. This Post discusses that litigation trend, and offers some practical advice to employer investment committees or other plan fiduciaries.

Existing Fee Based Lawsuits

For the most part, the existing lawsuits have focused on plan recordkeeping fees. Recordkeeping is a somewhat generic service, thus making recordkeeping fees an easy target. Fee comparisons can be translated into an annual dollar amount. That enables a plaintiff to simply compare the dollar amounts to make a case.

Other fee-based lawsuits have focused on the fees associated with investment option "share classes". Share class fees are easy targets for plaintiffs because the underlying investment option can be identical between share classes while expenses and fees vary, resulting in differing returns for the same underlying investment option. If the plan is simply not offering a less expense "share class", the plaintiff has a case.

Target Date Fund Cases

More recently, there has been a spate of new lawsuits directed at the "target date" retirement funds being offered in plans.

Some of those lawsuits seem to have allegations that are primarily excessive fee based in nature.2 Similarly, in another case, the claim is that the fees associated with custom, actively managed target date funds are excessive because there are cheaper "off the shelf" funds available.3

However, the Plaintiffs are going a step further in a case against United Healthcare.4 In that case, the plaintiffs are arguing that a fiduciary violation has occurred because of poor investment performance of the plan's target date funds.

The fundamental basis for this claim seems to rest on an examination of -year average returns of the target date funds that are in the plan, compared to certain indices that measure fund performance and other target date funds. For example, the complaint looks at the "2040" target retirement date funds of various investment providers, and compares the investment results over a five-year period.

The Plaintiffs argue that the United Healthcare target date funds should have been removed from the plan after their poor performance over an initial five-year period, as a prudent fiduciary should consider...

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