The performance of the actively-managed Fidelity Freedom Fund was allegedly comparable to the passively-administered Freedom Index Fund. However, the administrative expenses for the Index Fund were far less than those for the Freedom Fund. The net effect was that, over time, participants in the Index Fund had more retirement savings.
The legal question, then, is whether the law required the plan’s fiduciaries to drop the Freedom Fund option? Is a relatively expensive actively-managed feature in a target date investment scheme a breach of ERISA’s fiduciary obligations per se?
Careless scheme, careless oversight
Both Ms. Gleason and Ms. Gabrielse were participants and the plan and claim that they suffered individual losses because of the plan’s inclusion of the Freedom Fund option. More compellingly though, they argue that such a decision amounted to mismanagement which harmed all similarly-situated participants.
The basic argument goes right to structural issues. The Complaint posits that the plan fiduciaries breached the duties they owed to the plan, to the named plaintiffs, and to the other participants by:
- authorizing the plan to pay unreasonably high fees for retirement plan services; and
- maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and better performance.
Two Fidelity funds and a target date strategy
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 that gradually shifts to become more conservative as the assumed target retirement year approaches. It can be a good choice for people who have more important things to do in life than manage their retirement savings. It’s relatively automatic.
Among the plan’s target date offerings, two were risky Freedom funds (the “Active suite”) generally targeted to the earlier phases of an employees’ work life. The substantially less costly and less risky Freedom Index funds (the “Index suite”) were generally more suitable for years closer to retirement. While the Active suite invested predominantly in actively managed Fidelity mutual funds, the Index suite placed no assets under active management, electing instead to invest in Fidelity funds that simply track market indices.
The Complaint argues that the Active suite was dramatically more expensive than the Index suite, and riskier in both its underlying holdings and its asset allocation strategy. Therefore, the fiduciaries’ 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 period in question, constituted a glaring breach of their fiduciary duties.
The argument is striking for its specific reference to two specific Fidelity funds. It is also very similar to several other recent lawsuits that target plans that include those two funds.
Similar ERISA lawsuits
A 2020 ERISA lawsuit filed in New York, Maisonette v. Omnicom Group targeted the same two Fidelity funds. The same was true of the California ERISA lawsuit Ornelas v. Prime Health Care Services. Similar allegations reportedly surfaced in earlier ERISA lawsuits against Costco, Quest Diagnostics, IQVIA Holdings and Eversource.
Plan fiduciaries must realize by now that the inclusion of the Fidelity Freedom Fund as an element of a target date option is strategically risky. Plan participants who have opted for a target date scheme in a retirement plan should certainly investigate whether the Fidelity Freedom Fund is part of the mix.
Practical steps aside, that begs the legal question, however. Is the inclusion of an actively-managed option necessarily an ERISA breach?
ERISA fiduciary duties
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Whether or not an expense is reasonable is largely evaluated in terms of process. The emphasis in fiduciary breach ERISA lawsuits tends to be on whether there is evidence that fiduciaries actually had a systemic process for reviewing investment results and expenses. It is very fact-specific. This latest wave of lawsuits is somewhat different, however, because it tends toward the argument that a certain type of investment vehicle is, by definition, evidence of mismanagement.