While the complaints differ a bit, they are similar. This article uses the Microsoft complaint to illustrate the claims.

“[A]s is currently in vogue, Defendants [the plan committee members] appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate returns. 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. However, Defendants failed to act solely in the interest of Plan participants and breached their fiduciary duties by imprudently selecting, retaining, and failing to appropriately monitor the clearly inferior BlackRock TDFs.” 

Let’s compare those allegations to what mutual funds analysts say about the BlackRock TDFs. So, what does Morningstar have to say? Well, its analysts give it a Gold (high) rating and comment that:

“This Index-based series benefits from BlackRock’s robust approach to asset allocation and a research-intensive culture. They keep costs low by investing exclusively in passive Index funds, though this gives management fewer tools to outperform over shorter periods compared with more active strategies that can tactically tilt the portfolio or select talented active managers. Yet, the team continues to innovate, with current research looking at ways to get targeted fixed-income exposures across the glide path.”

How can we make sense out of these conflicting statements?

The answer lies in the unique feature of TDFs: The asset allocation and glide path. From a fiduciary perspective there are a handful of important factors to consider in evaluating TDFs. Those include: (i) the asset allocation, (ii) the glide path (which can be reviewed as the asset allocation at each target date), (iii) the terminal date of the glide path (that is, the TDF suite’s glide path designed to be to or through retirement), (iv) the selection of investments to populate the asset allocations, and (v) the expenses of the TDFs. 

While it’s not entirely clear, it appears that the plaintiffs’ attorneys are complaining about BlackRock’s asset allocation and the selection of investments that populate the allocations. That is because the complaint asserts, as proof of imprudence, that the BlackRock TDFs underperform a benchmark that averages several of the most popular TDFs managed by other mutual fund advisers. Since the BlackRock TDFs use Index funds to populate the allocations, let’s focus on the asset allocations.

However, all of those “comparator” TDFs (as the plaintiffs’ attorneys call them) are “through” retirement, while the BlackRock TDFs are “to” retirement. 

“Through” retirement TDFs continue their glide paths after the “target” retirement age, for example, the glide path of a 2020 TDF continues to transition after the anticipated retirement age of a participant invested in that fund, which would be in or about 2020. That approach makes sense if the participant stays in the plan after retirement or if the participant cashes out, rolls over into an IRA, and then reinvests in the 2020 TDF. If neither of those occur, a “through” TDF is, as a practical matter, just an aggressive “to” TDF. As a comment, fiduciaries and their financial professionals should consider this issue and, for risk mitigation, should document their considerations and conclusions in committee minutes or a memo to the file.

“To” retirement TDFs are, as the name suggests, TDFs whose glide paths become more conservative as participants approach their retirement dates, and then level off at the targeted retirement date. That would be consistent with a 401(k) plan whose participants cash out their benefits at retirement, roll over to an IRA, and then invest in ways that are not known to the plan fiduciaries.

By design, “to” TDFs tend to have more conservative allocations at their targeted maturity dates, while “through” tend to have more aggressive allocations at the targeted dates. That is consistent with the “to” BlackRock TDFs and the “through” comparator funds.

If the complaints have merit, it raises the issue of whether plan fiduciaries can prudently select more conservatively designed ‘to’ TDFs.

If the complaints have merit, it raises the issue of whether plan fiduciaries can prudently select more conservatively designed “to” target date funds.

Other courts have considered the issue of fiduciary flexibility to select more conservative investments where the fiduciaries thought that was appropriate for the covered participants. For example, in a case involving the Lowe’s 401(k) plan, a court held that a more conservative fund was prudent even though a more aggressively designed fund might have generated greater returns. To quote the opinion: “ERISA does not require fiduciaries to chase returns or prioritize raw returns over other considerations, including the higher risk associated with higher expected returns.” 

The court’s opinion also noted:

“Gallagher’s reports to the Committee emphasized the Growth Fund’s superior long-term risk-adjusted returns relative to peer funds, as measured by Morningstar’s assignment of a five-star rating to the Growth Fund. In sum, if an independent investment consulting fiduciary (with its own fiduciary obligations which have not been challenged) did not view the inclusion of the Growth Fund in the Lowe’s Plan’s during the relevant period as improper, then it is difficult for the Court to conclude that Aon should, as a matter of law, have removed the Growth Fund from the Plan lineup. Accordingly, the Court concludes that Aon has not breached its fiduciary duty of prudence in retaining the Growth Fund in the Lowe’s Plan.”

In the Intel case, which involved the 401(k) plan’s TDF suite, a court held that the fiduciaries prudently selected more conservative designed TDFs. The court went so far as to say that fiduciaries can’t be forced to chase performance with more aggressive funds when they determine that more conservative (and less volatile) investments were appropriate for their participants. To quote the court:

“In short, Plaintiffs argue that Defendants never should have pursued a risk mitigation strategy at all and that Defendants should have been looking for ways to change their risk mitigation strategy to a riskier strategy that could provide more returns for employees. However, Plaintiffs’ new theory fails to state a claim under current case law. ERISA fiduciaries are not required to adopt a riskier strategy simply because that strategy may increase returns.”

Concluding Thoughts and Considerations

Because of the Intel and Lowe’s decisions (and similar decisions by other courts), I don’t believe that the claims in these complaints will be sustained. However, there are lessons that fiduciaries can learn from the complaints:

• Determine, based on the demographics of the plan’s participants, whether the target date funds should be conservatively or aggressively designed. 

For example, for a law firm that sponsors a cash balance plan in addition to a 401(k) plan, does it make sense to have aggressive TDFs since the cash balance plan could be viewed as a conservative investment? Or does it make sense to have a conservative or moderate design for the TDFs since the participants in the plans are already likely to be financially secure and may not need to take additional risk? That is for the fiduciaries to decide and neither decision is necessarily wrong, even though they are different. The key is that a thoughtful consideration be given to the issue and a reasonable decision be made. 

On the other hand, should a company in an industry that lays off many of its employees during economic (and probably market) downturns have a conservative allocation methodology for its TDFs since those laid-off employees may cash out when the market is down? There isn’t a right or wrong answer, but the plan fiduciaries should consider the issues and make reasonable decisions.

• Determine, based on participant behavior, whether the plan should have a “to” or “through” TDF suite.

For example, do the participants stay in the plan after retirement—and therefore obtain the benefit of the continuing glide path of a “through” fund? Or do they rollover to IRAs and re-invest in the same vintage of the same TDF? If not, then the fiduciaries should ask and answer why they have a “through” design for their TDFs, if the plan actually operates as a “to” plan. As suggested earlier, one possible answer is that the fiduciaries want a more aggressive glide path and therefore they are using a “through” design as a “to” vehicle. The key is that the fiduciaries be aware of what they are doing and then make a decision in the best interest of the participants.

Now is the time to review TDFs in light of the recent interest of plaintiffs' attorneys.

Target date funds are becoming the “targets” of ERISA fiduciary breach lawsuits. Why? One reason is because that is where the money is. Another may be that plan fiduciaries have just accepted the TDFs affiliated with their plan providers without analysis of the needs of their participants and without consideration of how the plan operates. Now is the time to review TDFs in light of the recent interest of plaintiffs’ attorneys. The issues raised in this article are a good starting point for that analysis.