Plan Sponsor Sued Over ‘Untested’ TDFs

The lawsuit alleges Molina Healthcare offered target-date funds in its 401(k) plan that employed a management style that had never been used before, among other things.

A group of former employees who participated in Molina Healthcare’s 401(k) plan have sued the organization and various John Doe defendants for alleged violations of the Employee Retirement Income Security Act.

The lawsuit says defendants caused plan participants “to invest in flexPATH’s untested target-date funds, which replaced established and well-performing target-date funds used by participants to meet their retirement needs.” The defendants are also accused of failing to use the plan’s bargaining power to obtain reasonable investment management fees.

According to the complaint, the flexPATH Index TDFs are collective investment trusts maintained by Wilmington Trust. It says that when the full suite of TDFs launched in January 2016, their management style had never been used in any TDF solution offered in the marketplace.

“The novel and untested target date fund management style combined index or passive management strategies with multiple glidepaths,” the complaint explains. “flexPATH did not actually invest the flexPATH target date funds’ underlying assets. Rather, flexPATH utilized a ‘fund of funds’ structure for the target date funds, whereby it allocated fund assets among various underlying funds managed by an unaffiliated investment manager.”

The complaint further explains that, for example, the flexPATH Index Aggressive 2025 Fund invests in the BlackRock LifePath Index 2030 and 2035 funds (F shares).

The lawsuit alleges that because flexPATH invested the underlying assets of the TDFs in BlackRock TDFs, additional fees were charged compared to the fees that would have been charged to investors had they invested directly in BlackRock’s funds. The BlackRock LifePath Index TDFs charge 8 basis points, or bps, while flexPATH charged plan participants 26 bps.

When Molina added the flexPATH Index TDFs to the plan around May  2016, the funds replaced the Vanguard Target Retirement TDFs, which the complaint says “were established and well-performing target date funds in the marketplace.” More than $210 million of the plan’s assets (or 45% of the plan’s total assets) were transferred to the flexPATH Index TDFs during 2016, and the amount of plan assets in the funds increased to more than $360 million (or 57% of the plan’s assets) as of December 31, 2019.

According to the complaint, the management style of the TDFs had never been used in any TDF offered in a 401(k) plan. It says this “novel and untested management style” was “magnified by the inexperience of the funds’ investment manager (flexPATH), which had no established track record as an investment manager, had only managed assets for investors since June 2015, and only recently completed the launch of the flexPATH Index target date funds in January 2016.” The lawsuit notes that there were not even two quarters of actual performance history for Molina to consider when evaluating how the flexPATH Index TDFs performed under actual market conditions.

The plaintiffs claim that when making investment decisions, prudent fiduciaries of defined contribution plans consider the performance history, portfolio manager experience, and manager tenure of available investment alternatives. They allege that a prudent and loyal fiduciary would not have recommended or selected the flexPATH Index TDFs “without a five-year performance history to assess the investment manager’s ability to provide superior long-term investment returns relative to prudent alternatives available to the plan.”

In addition, the lawsuit accuses Molina of not prudently monitoring the performance of the flexPATH Index TDFs after their inclusion in the plan. It alleges that the fund underperformed other established TDFs available in the marketplace, yet Molina maintained these funds in the plan until late 2020, when they were replaced with the Fidelity Freedom Index TDF series.

The plaintiffs also call out the share classes of the TDFs and other investments offered in Molina’s 401(k) plan. They say that given the plan’s size, plan fiduciaries “had tremendous bargaining power to obtain share classes with far lower costs than that of higher-cost shares.” According to the complaint, Molina provided I1 shares of the flexPATH Index TDFs, which included charges of 24 to 25 bps, while R shares for the funds included charges of 19 to 20 bps. It says the plan also included other mutual fund investments in higher-cost shares than were otherwise available to the plan for the identical investment.

“By providing plan participants the more expensive share classes of investment options, Molina caused participants to lose in excess of $1 million of their retirement savings,” the lawsuit alleges.

Molina Healthcare has not yet responded to a request for comment about the lawsuit.