If you’re a sponsor or trustee of a 401(k), 403(b), 457, or other defined contribution plan, you might believe that the use of “target date retirement funds” (TDFs) shields you from potential class-action lawsuits alleging a breach of fiduciary duty. You may also think that opting for the lowest cost providers would further safeguard you against such accusations. Unfortunately, these assumptions could lead you down a precarious path.

Recently, ThinkAdvisor reported a surge of lawsuits against companies like Citigroup and Genworth Financial, among others, due to the underperformance of their BlackRock TDFs. This highlights an often overlooked tension between cost and performance: “Citigroup, Genworth Face Lawsuits Over BlackRock TDFs in Their 401(k)s”, Melanie Waddell reports that:

“Citigroup and Genworth Financial are among at least six firms that are facing class-action lawsuits filed since Friday over “underperforming” target date funds from BlackRock. . . .”

Earlier class-action lawsuits against plan sponsors and trustees primarily centered around excessive cost-related claims, which were relatively straightforward to prove. However, these excess cost-related claims tend to be marginal compared to the potential damage from chronic underperformance claims, which can accumulate significantly over time.

As legal firms become more aware of this discrepancy, they are shifting their focus towards alleged chronic underperformance as a violation of fiduciary duties. Consequently, plan sponsors, trustees, and their advisors who have been emphasizing lower-cost choices as a protective measure may find themselves in hot water.
The class-action suits argue that the BlackRock TDFs underperformed compared to many alternative mutual funds. The lawsuits stress that any objective evaluation of the BlackRock TDFs would have led to the selection of better-performing options. Instead, defendants are accused of chasing low fees without considering return on investment.

This brings us to an essential point: cost and performance should not be considered in isolation; they must be evaluated in tandem. The process of “weighing” these factors is critical, although the specifics of this process and the definition of “performance” remain undefined.

At Decision Technologies Corporation (DTC), we’ve spent decades addressing these issues. Our newly released Professional RapidReview ToolTM / our “ProRRTTM” allows for a comprehensive evaluation of up to 48 different performance parameters, including costs. This tool enables plan trustees to objectively score and rank thousands of choices, identifying those best at producing the desired composite performance over time.
By using this selection and ongoing performance monitoring process, plan trustees can demonstrate that they have fulfilled their fiduciary duty and acted in the best interests of their plan’s participants.

If you’re a trustee of a defined contribution plan, we encourage you to visit our Trustee Empowerment & Protection, Inc. website, which refers plan sponsors and trustees to investment advisors trained to perform protective reviews of your plan’s investment options. Understanding and mitigating your risks, including personal liability, is crucial.

And if you’re an investment advisor, we invite you to learn how DTC’s patented decision-assistance technology can enhance the investment recommendations you offer to your clients. Visit our Trustee Empowerment & Protection, Inc. website to learn how you can qualify to provide these protective reviews, expanding your advisory business while serving a vital role.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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