Target Date Fund is the New Fiduciary Target

On August 2, 2022, a class action suit was filed against the 401(k) Administrative Committee of the Microsoft Corporation Savings Plus Plan. The Plan assets were valued at $38.34 billion representing 135,252 participants with account balances. The Plan is a participant‐directed 401(k) plan. The investment options made available to Plan participants include various mutual funds, collective trust funds, SMAs, Microsoft Common Stock, and a self‐directed brokerage account.

The lawsuit alleges:

  • POOR RELATIVE PERFROMANCE – since at least December 31, 2009, the Plan offered the BlackRock LifePath Index Funds (“BlackRock TDFs”), a suite of ten TDFs. The BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers throughout the Class Period (2016 June to 2022 June).  A simple weighing of the merits and features of all other available TDFs (focusing only on Am Funds, Fidelity Freedom Index, TR Price, and Vanguard TDFs as comparative examples) 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.
  • FAILURE TO SERVE IN THE SOLE INTEREST OF PARTICIPANTS -Microsoft appears to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return. Microsoft failed to act in the sole interest of Plan participants and breached their fiduciary duties by imprudently selecting, retaining, and failing to appropriately monitor the clearly inferior BlackRock TDFs.
  • FAILURE TO PRUDENTLY MONITOR – prudent fiduciaries evaluate TDF returns not only against an appropriate index or a broad group of all peer TDFs, but also against specific, readily investable alternatives to ensure that participants are benefitting from the current TDF offering.  The managers of the BlackRock TDFs, like those of many TDF suites, have designed a custom benchmark against which their performance can be assessed.  For each TDF vintage, the BlackRock LifePath Index Custom Benchmark is a weighted mix of several market indices that are representative of the asset classes in which the BlackRock TDFs invest.  As this composite benchmark simply mirrors the overall strategy of the series and fails to demonstrate how the investment is performing relative to peers, it is an imperfect evaluative tool.  Rather than demonstrate the success of the BlackRock TDFs in the broader TDF market, as, for example, can be achieved (and is commonly performed) by utilizing the S&P 500 Index to benchmark a domestic large cap equity fund, the BlackRock TDF custom benchmark merely reflects the managers’ ability to execute their own particular strategy.  Thus, it is incumbent on plan fiduciaries and a component of the applicable standard of care throughout the Class Period to assess TDFs against readily available prudent alternatives to ensure that participants are best served by the options available to them.

The Complaint also pointed out that any suggestion that such comparison is inappropriate because “to” glide paths, like that of the BlackRock TDFs, adopt a more conservative approach is misleading.  While the BlackRock TDFs de‐risk at a quicker pace than most of the Comparator TDFs, the resulting equity allocation discrepancy is only reflected in its two most conservative vintages, the 2025 and Retirement TDFs.  Indeed, the BlackRock TDF series has the industry’s most aggressive glide path for investors furthest from retirement and maintains a comparable equity allocation to its peers until an investor is approaching retirement.

This is one of a handful of identical class action suits[1] filed against plan fiduciaries regarding their imprudent selection and maintenance of the BlackRock LifePath target date suite as investment options under the plan.  This group of complaints emphasis performance more than low fees and now TDF and investment performance may be the new frontier for the next wave of fiduciary suits.  Further, the fact that the TDF serves as the QDIA exaggerated the impact of underperformance (in the case of Microsoft, 24% of plan assets are invested in the TDF, ex-Microsoft stocks.)

In light of this latest group of class action lawsuits, fiduciaries should consider personalization as an improved alternative to demonstrate their adherence to ERISA’s “sole interest” standard.  This is where each participant’s personal factors (age, salary, account balance, employer contribution and employee voluntary contributions), readily available on the plan’s recordkeeping platform, are taken as inputs into designing participant-specific portfolio for each participant.  On an ongoing basis, as the inputs are updated, the personalized portfolio would correspondingly adjust to reflect the new information. This approach:

  • focuses each participant portfolio on a one-on-one rather than using U.S. worker average data to construct portfolios;
  • includes an ERISA 3(38) fiduciary manager to be responsible for participant-level allocation and ongoing monitoring as well as benchmarking the performance (against benchmark) of the underlying investment options; and
  • uses a mix of active and passive managers keep the investment cost in check

Individual Glide Path Solution or iGPS© is one of the first personalized target date solutions designed specifically as a QDIA and is available at recordkeeper platforms connected with iJoin©.

[1] Citicorp, Wintrust, Black & Decker, CISCO, Booz Allen, Microsoft, Genworth, Advance Publication