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Portfolio > Mutual Funds > Target Date Funds

‘Cookie Cutter’ BlackRock TDF Suits Should Be Tossed: Retirement Groups

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What You Need to Know

  • A law firm has sued 11 large companies, including Booz Allen Hamilton, that are offering a suite of TDFs that have underperformed.
  • The suits argue they have breached their fiduciary duty; the retirement industry says these claims are based on outcome, not process.
  • Plan fiduciaries would be placed in an untenable spot if the court accepts the plaintiff's argument, the industry groups say.

Retirement industry groups are pressing back against the recent spate of class-action lawsuits that have been filed against 11 firms for breaching their fiduciary duties by offering “underperforming” target date funds from BlackRock in their retirement plans.

The ERISA Industry Committee (ERIC) along with the American Retirement Association and the American Benefits Council filed an amici curiae — or friend of the court — brief Monday in support of Booz Allen Hamilton, one of 11 firms that have been sued for offering the BlackRock LifePath Index Funds, a suite of 10 TDFs.

The suits claim that 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.”

If the suit against Booz Allen is allowed to proceed, it “will put the fiduciaries of defined contribution plans across the country in a no-win situation,” the three retirement industry groups state in their brief.

James Gelfand, president of ERIC, which represents large employers that sponsor health and retirement plans, said Monday in a statement that federal courts “should dismiss cases where plaintiffs’ lawyers bring allegations based purely on hindsight.”

If these cases “are allowed to proceed based solely on the outcome instead of the process used to select funds, the exploding costs and risks of 401(k) litigation will continue to undermine retirement security for workers and retirees,” Gelfand said.

So far, there have been 11 “cookie-cutter lawsuits filed by the same law firm in district courts around the country alleging fiduciary breaches by simply offering these TDFs,” Gelfand added.

The complaints, Gelfand maintains, “rely on a flawed allegation that because the funds briefly underperformed four plaintiff-selected competitor funds, plan sponsors placed too much consideration on the funds’ low management fees instead of eventual returns.”

Retirement Groups’ Arguments

“In stark contrast to past imprudence suits, which have alleged that fiduciaries should have chosen lower fee and better performing investment fund alternatives, the Plaintiff here claims imprudence exclusively based on the fiduciaries’ selection of a BlackRock fund suite that allegedly underperformed — solely on short-term returns — a set of four cherry-picked so-called comparators with little in common with the challenged BlackRock funds beyond the ‘target date fund’ label,” the groups’ brief in support of Booz Allen states.

The plaintiff’s “myopic fixation on a single variable among many that fiduciaries must consider in determining plan investment offerings creates a particularly menacing prototype for fiduciary strike suits, seeking a declaration that a fund suite is per se imprudent notwithstanding its fees, risk profile, or rating among market analysts — all of which the Complaint and its sources acknowledge are exemplary for the BlackRock fund suite here — among other factors,” the groups state.

The plaintiff’s theory, the groups’ brief continues, “is also badly out of sync” with the law on fiduciary duties.

“It is beyond dispute that if a fiduciary made annual decisions based solely on past performance, the fiduciary would breach his or her duty of prudence by ignoring the vast majority of other factors that must be considered, including risk tolerance, diversification, quality of management, and the nature of the covered workforce,” the groups’ brief states.

“Indeed, if the Complaint (or any of its roughly one dozen identical copies filed simultaneously against other plan fiduciaries) survives a motion to dismiss, plan fiduciaries across the United States will be rendered vulnerable to suit for including any fund options that prioritize low management fees, risk mitigation, or any other factor a prudent fiduciary may consider over past returns,” the brief states.

Such an approach, it adds, “would also lead to disastrous fiscal results, with plan fiduciaries consistently buying high and selling low, all in the futile pursuit of past performance.”

Next Steps

Andrew Banducci, senior vice president, retirement and compensation policy, at the ERISA Industry Committee told ThinkAdvisor Monday in an email that the three groups haven’t decided if they will file briefs in the other cases.

The Booz Allen case “is procedurally ahead of the other ones,” Banducci said. “We’re supportive of the judge granting a motion to dismiss the complaint” against the company.

The other companies that have been sued are:

  1. Cisco Systems
  2. Citigroup
  3. Stanley Black & Decker
  4. Wintrust Financial
  5. Capital One Financial Corp.
  6. Genworth Financial
  7. Microsoft
  8. Marsh McLennan
  9. Advance Publications
  10. CMFG Life Insurance Co.


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