At issue is the fiduciaries’ choice of the actively managed Fidelity Freedom fund (the “Active Suite”) rather the cheaper and safer Fidelity Freedom Index funds (the “Index Funds”), which are passively managed. Over the past several years, many breach of fiduciary duty lawsuits have focused on the same issue. Given the litigation risk, some find it puzzling that plan administrators persist in this choice.
Mismanagement at the top
On November 24, 2020, plan participants Cheyenne Jones and Sara J. Gast filed a lawsuit in U.S. District Court in Charlotte, N.C. The lawsuit claims that:
- participants were not notified of the plan's expenses and the risk of its investment options;
- the defendants "allowed unreasonable expenses to be charged to participants;" and
- they selected and retained high-cost and poor performing investment options when there were more prudent alternative investments available.
The Complaint alleges that the plan paid investment-related fees that were 55 to 68 percent higher than the average total cost for comparable plans. In 2019 alone, they claim, “considering just the gap in expense ratios from the Plan’s investment in the Active Suite to the Institutional Premium share class of the Index suite,” the plan overpaid roughly $2.74 million in costs.
What is a target-date plan and why does it matter?
The plan is a participant-directed 401k plan. Participants direct the investment of their contributions into the various investment options selected by plan administrators on the advice of the trustee. Each participant’s account is credited with contributions. Losses are subtracted proportionally. The plan pays expenses from plan assets. The majority of administrative expenses are passed through to participants, which additionally reduces their investment income. The greater the losses and higher the expenses, the less plan participants will ultimately have at retirement.
Among other options, the plan offered a suite of fourteen target-date funds. A target-date fund is an investment vehicle that offers an all-in-one retirement solution through a portfolio of underlying funds that gradually shifts to become more conservative as the participant’s retirement date nears.
It’s a “set it and forget it” strategy for those who have no desire to actively monitor the underlying investments in their retirement accounts. Participants who choose a target-date option rely on the plan’s trustee (in this case Fidelity Management Trust Company) and the plan administrators to manage their money.
Fidelity allegedly bungled the job. The plan’s administrative committee, which had selected Fidelity as trustee, then failed to catch the problem. The administrative committee had a legal duty under ERISA to ensure that plan assets were managed prudently and for the exclusive benefit of participants and beneficiaries. Because the committee failed to monitor what the trustee was doing, it and its members are the defendants in this ERISA lawsuit.
ERISA’s fiduciary standards
ERISA Section 404 requires plan fiduciaries to:
- discharge [their] duties with respect to a plan solely in the interest of the participants and beneficiaries;
- for the exclusive purpose of providing benefits to participants and their beneficiaries; and
- with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.