More ERISA Plaintiffs Challenge Use of Active TDF Suit

A new lawsuit claims the defendants failed to compare the merits of active and index target-date fund suites managed by Fidelity.

A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the Southern District of New York, naming as defendants the Omnicom Group and various individuals and committees who are alleged to be fiduciaries of the media company’s retirement plan.

The plaintiffs say these fiduciaries breached the duties of prudence and loyalty demanded by ERISA in their management and oversight of the plan’s investment menu. The complaint alleges ERISA breaches occurred when the company failed to fully disclose the expenses and risk of the plan’s investment options to participants; when it allowed unreasonable expenses to be charged to participants for administration of the plan; and when it selected, retained, and/or otherwise ratified high-cost and poorly performing investments.

According to the complaint, which seeks class action status, the plan in question has nearly 37,000 participants with account balances and assets totaling nearly $2.8 billion. The plaintiffs specifically seek a declaratory judgment that an ERISA violation occurred, a permanent injunction prohibiting the practices described in the suit, and other forms of relief for further losses and/or compensatory damages. Like the many other ERISA suits filed in recent years, the plaintiffs also seek to have the defense pay any attorneys’ fees, costs and other recoverable expenses of litigation.

The text of the suit claims that, from at least December 31, 2009, through at least December 31, 2018, the plan offered the Fidelity Freedom Fund target-date suite.

“Fidelity Management & Research Company (Fidelity) is the second largest target-date fund provider by total assets,” the lawsuit states. “Among its several target-date offerings, two of Fidelity’s target-date offerings are the risky Freedom funds (the active suite) and the substantially less costly and less risky Freedom Index funds (the index suite). Defendants were responsible for crafting the plan lineup and could have chosen any of the target-date families offered by Fidelity, or those of any other target-date provider.”

The suit claims the defendants failed to compare the active and index suites and consider their respective merits and features.

“A simple weighing of the benefits of the two suites indicates that the index suite is and has been a far superior option, and consequently the more appropriate choice for the plan,” the suit claims. “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. Instead, defendants failed to act in the sole interest of plan participants, and breached their fiduciary duty by imprudently selecting and retaining the active suite for the majority of the relevant period.”

The text of the lawsuit states that the two Fidelity fund families have nearly identical names and share a management team. The active suite, however, invests predominantly in actively managed Fidelity mutual funds, while the index suite places no assets under active management, electing instead to invest in Fidelity funds that track market indices.

“The active suite is also dramatically more expensive than the index suite, and riskier in both its underlying holdings and its asset allocation strategy,” the complaint states. “Defendants’ decision to add the active suite over the index suite, and their failure to replace the active suite with the index suite at any point during the class period, constitutes a glaring breach of their fiduciary duties.”

These allegations call to mind the various other ERISA lawsuits that have similarly questioned plans’ use of Fidelity Freedom Funds. These have seen mixed results, but most recently, the defense prevailed in the case known as Ramos vs. Banner Healthat least on the question of whether offering the actively managed suit indeed represented a fiduciary breach. That decision flatly states that the plaintiffs’ arguments about the performance of the active funds “fails to carry their burden to show that the Fidelity Freedom Funds were imprudent investment options,” such that the Banner defendants should have removed these funds as a plan investment alternative by the second calendar quarter of 2011.

It should be stated that Fidelity has not been named as a defendant in this case or in the other anti-active investment suits that have been filed. Still, much of the text of the lawsuit is devoted to criticizing the actively managed target-date funds’ cost and performance. Other funds and managers are also similarly called out by name in the complaint, including the Morgan Stanley Institutional Fund Inc. Small Company Growth Portfolio and the Neuberger Berman Socially Responsive Fund Class R6. The plaintiffs say these are examples of funds that consistently lagged their benchmarks but were nonetheless retained in the plan for extended periods.

The full text of the complaint, which also includes allegations that the plan fiduciaries permitted the payment of excessive recordkeeping fees, is available here