Northern Trust Sued Over 'Poorly Performing' Target Date Funds

Northern Trust was hit with an ERISA class-action suit Tuesday for loading its retirement plan with “poorly performing” proprietary target date funds that underperformed similar offerings.

The suit, filed in the U.S. District Court for the Northern District of Illinois, was brought by current and former Northern Trust employees.

It argues that the firm, based in Chicago, breached its fiduciary duties to prudently select and monitor the plan’s investment options, including by automatically enrolling participants in the firm’s target date funds, the Northern Trust Focus Funds.

Northern Trust, the suit states, “failed to regularly monitor plan investments and remove or replace ones that become imprudent. Instead, in disregard of their fiduciary duties, defendants loaded the plan with poorly performing proprietary funds called the Northern Trust Focus Target Retirement Trusts … and then kept these Funds on the Plan’s investment menu throughout the Class Period despite their continued underperformance.”

Northern Trust said in a statement shared with ThinkAdvisor that it “believes the Northern Focus Funds have been an appropriate vehicle for retirement savings, and plans to defend itself from the lawsuit’s claims.”

The suit states that “despite a market flush with better-performing alternatives,” Northern Trust selected the Northern Trust Focus Funds to be the plan’s target date asset class investment option.

The Northern Trust Focus Funds “have significantly underperformed their benchmark indices and comparable target date funds since Northern Trust launched them in 2010,” according to the suit.

“For nearly a decade, the Northern Trust Focus Funds have performed worse than 70% to 90% of peer funds,” the suit claims. “Still, Defendants refuse to remove the Northern Trust Focus Funds from the Plan’s menu of retirement investment options. Defendants have even selected the Northern Trust Focus Funds as the Plan’s default investment options, an investment feature in which the Plan automatically invests participants’ retirement savings in a Northern Trust Focus Fund if they do not select another investment.”

The suit states that based on an analysis of data compiled by Morningstar Inc., the “plaintiffs project the plan lost tens of millions of dollars in retirement savings since 2015 because of defendants’ decision to retain the Northern Trust Focus Funds in the Plan instead of removing them.”