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Booz Allen Hamilton BlackRock Target Date Funds at Heart of New ERISA Lawsuit

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Who’s minding the store?

Richmond, VAOn August 2, 2022, Michael Tullgren filed a class action ERISA lawsuit against Booz Allen Hamilton Inc. and fiduciaries of the company’s Capital Accumulation Plan in the Eastern District of Virginia. Tullgren v. Booz Allen Hamilton alleges that company violated its fiduciary duty under ERISA by including poorly performing BlackRock target date funds in its investment menu.

This is one among many recent 401k retirement plan lawsuits that focus on BlackRock LifePath Index Funds or target date funds in general. This marks a new trend because the lawsuits focus on investment performance, rather than self-dealing and excessive fees. The lawsuits raise new and challenging issues under ERISA.

When is it not enough to evaluate process?  When do retirement savers get the chance to hold the pension investment industry accountable for poor results?

What’s a target date fund?    

Target date funds periodically rebalance the fund’s assets to optimize risk and returns for a particular time frame, typically retirement age or life expectancy. There are two varieties of target date funds. One is generally described as a “to retirement” fund, which sets the target date as retirement date (often age 65). The other, with a longer view, sets the target date according to life expectancy.

In 2022, in the U.S. the life expectancy for women aged 50 is roughly 82 years. For men aged 50 in 2022, it is roughly 78. There are a lot of variables, of course. But, in either case, the investments in a target date fund become more conservative and risk-averse as the target date approaches.

Workers, who have lives to live and things to do other than watching their retirement fund investments, often prefer a “set-it-and-forget-it” approach.  They may be more comfortable with target date funds.

The issue – to put it frankly – is who bears the risk of underperforming investments. The niggling suspicion is that retirement savers may have misplaced their trust in plan fiduciaries who bear very little risk for underperforming investments.

Cracking the black box  

The problem, as it is with any investment choice, happens when the return on investment is less than expected. This can happen for a number of reasons – perhaps investment management fees were too high or the return was just too low.

Tullgren is about the latter problem. That’s new.

Nearly 50 years ago, when ERISA was enacted, most company retirement plans were defined benefit plans. The company promised a certain monthly benefit for the life of a retiree beginning at the normal retirement age. If the plan’s investments performed poorly (or the retiree lived much longer than average) the employer had to ante up more money. As a consequence, plan fiduciaries monitored risk and investment performance like hawks.

Now, however, most employer retirement plans are designed differently. They are defined contribution plans. In a defined contribution plan, the employee decides how much money to put toward retirement. Generally, employees get to choose among investment funds that are in line with their tolerance for risk. It is often a reasonable choice to reduce risk as retirement or anticipated life expectancy nears.  

The risk of poor investment return (or an unusually long life) falls on the employee. That seems a little rugged for folks who work hard and have things to do other bathe in the money pit. Hence the popularity of target date plans. But what happens when the menu of investment options, even in a target date plan, is overly risky, perhaps because the fiduciaries were focused on cost rather than return?

The back door to re-allocating risk to plan fiduciaries

ERISA Section 404 requires that plan fiduciaries act solely in the interest of participants and beneficiaries and to pay the reasonable expenses of the plan. Whether a plan expense is reasonable is largely evaluated in terms of process. The emphasis in fiduciary breach ERISA lawsuits has previously been on whether there is evidence that fiduciaries actually had a systemic process or reviewing investment results and expenses. It is very fact-specific. It does not evaluate the actual return on investments.

Tullgren and similar lawsuits blow this up. And that’s why the investment management community is up in arms. Their exposure is much greater if courts begin to study actual investment return.

These new lawsuits are about allocating risk -- more specifically, whether the risk should be more evenly divided between the retirement saver and the plan’s fiduciaries. The question is whether fiduciary responsibility in selecting investment options is the vehicle for re-evaluating the allocation of risk between retirement savers and plan fiduciaries.
It’s a new strategy. We shall see where it goes.


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