Plaintiffs alleged that the fiduciaries’ imprudent decisions and inadequate monitoring of the plan’s performance cost it more than $10 million. More to the point, Gleason v. Bronson Healthcare claims that these actions cut deeply into their individual retirement savings and amounted to a breach of the legal duties imposed on fiduciaries by ERISA. So, when do bad investment decisions violate the law?
It should be noted that participants in the plan, unlike many 401k plan participants, could not make their own individual choices about underlying investments. In a 403(b) plan, the employer selects the investment options. The Bronson Healthcare plan participants were, to a large degree, locked into the fiduciaries’ bad decision.
Fidelity Freedom Fund vs. Fidelity Index Fund
Susan Gleason and Candi Gabrielse, both healthcare professionals, were participants in the plan. They claimed that they and all similarly-situated individuals suffered individual losses because fiduciaries included the Fidelity Freedom Fund in the plan’s investment portfolio.
Losses by themselves, however, do not amount to a breach of duty under ERISA. The central question is whether those losses were caused by mismanagement. Gleason claims that by:
- authorizing the plan to pay unreasonably high fees for retirement plan services; and
- maintaining certain funds in that plan despite the availability of identical or similar investment options with lower costs and better performance,
The argument is not generic about the risks and rewards of active versus passively managed funds, however. It is a comparison of two specifically named funds the Fidelity Freedom Fund and the Fidelity Index Fund. This is not a new issue. Several lawsuits have targeted this specific question.
Intriguingly, their argument goes right to fundamental questions about plan design. Is it always a breach of fiduciary duty to include pricier, riskier, actively-managed funds in a target date portfolio?
Invest allocation on automatic
As the Complaint explains, the plan offered a suite of 14 target date funds. A target date fund is designed to offer an all-in-one retirement solution through a portfolio of underlying funds. The allocation between the alternatives gradually shifts to become more conservative as the assumed target retirement year approaches. The older a participant is, the more risk averse the allocation.
It's relatively automatic. It may be a sensible choice for people who have more important things to do in life (like caring for sick people) than managing their retirement saving investments.
Like many plan participants, Susan Gleason and Candi Gabrielse directed some of their retirement plan savings into the target date option. Beyond that, however, they had no control.
An adventurous idea gone awry?
Included in the plan’s target date offerings were two risky Freedom funds (the “Active suite”) generally appropriate for the earlier phases of an employees’ work life. They cost substantially more and were riskier than the Index funds, which were also available. As the theory goes, the greater the risk, the greater the potential reward.
On the other hand, The Fidelity Index fund (the “Passive Suite”) tracks the S&P and other indexes. The analysis is computer-generated. The costs are low because little or no human analysis is involved. The rewards are smaller, but so are the risks.
A 2015 Washington Post analysis suggests that is rare for an actively-managed fund to outperform the market as a whole, especially as that wager plays out over time. With respect to the Bronson Healthcare Plan, the bet does not seem to have paid off. Given the evidence, the fiduciaries’ decision to add the Active suite, and their failure to replace it with the Index suite after evaluating its financial performance may arguably have been a breach of their legal duty.
What was the fiduciaries’ legal duty?
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Reasonable but bad guess, or a dereliction of duty?
Several recent lawsuits have raised the same issue. But Gleason is poised to settle so, to many observers’ frustration, the question remains for another day.