401(k) Specialist Issue 3 - 2022 - 22

401(k) PRODUCTS
While cases targeting retirement plans
traditionally focused on fiduciary breaches
(high fees and improper share classes) under
the Employee Retirement Security Act
(ERISA), plaintiffs now allege low fees at
the expense of performance. It's a new twist,
with many industry watchers alarmed at the
potential precedent.
Among them is Daniel Aronowitz, managing
principal and owner of Euclid Fiduciary.
He says that if the Department of Labor
(DOL) won't step in and provide guidance, it
falls to the various judges in the cases to dismiss
them under the federal pleading standard.
" After years of higher-fee plans with
actively managed investment options facing
imprudence challenges, this next chapter in
the long war against large-plan fiduciaries
represents a cynical and meritless attack
against low-fee plans that must be dismissed
as implausible under the federal pleading
standard, " Aronowitz wrote in an August 9
blog post, just after the ninth suit against the
BlackRock TDFs had been filed.
" These lawsuits are manufactured imprudence
claims designed to profit off the
high risk and cost of defending high-stakes
litigation. That is exactly why the faithful
application of the pleading standard is crucial
to protect fiduciaries who have done nothing
wrong in their service to plan participants. "
He added that Miller Shah knows it costs
millions to defend this type of fiduciary imprudence
lawsuit. Nearly every settlement
in the excessive fee saga has been achieved
because the litigation risk is so high, and
each plan has fiduciary insurance.
" They know that it is unlikely that
any of the cases will go to trial in which
they would have actually to prove that
BlackRock funds have underperformed
any meaningful benchmark, " Aronowitz
continued. " The point is that it is not really
about the merits of the underperformance
case. Based on prior excessive fee precedent,
Miller Shah, unfortunately, does not need a
strong case, or even a truthful case, to succeed.
Instead, it is about marshaling enough
deceptive charts and claims to convince a
court to allow even one of these cases to
proceed past a motion to dismiss. "
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ISSUE 3 2022 | 401kSpecialist.com
Aronowitz is hoping that doesn't happen.
" If the Department of Labor is not going
to step in to restore justice to the fiduciary
system and advocate for plan fiduciaries
who managed some of the best plans in
America, then judges have to faithfully
apply the federal pleading standard to dismiss
these cases that lack sufficient proof of
investment underperformance, " he said.
A key takeaway for plan fiduciaries?
" Although this series of lawsuits demonstrate
that plan fiduciaries' selection of any fund may
be at risk for fiduciary breach claims, having a
robust system of plan governance in place can
make a company's 401(k) plan a less attractive
target for plaintiffs' lawyers, " according to a
Sept. 1 Holland & Knight Executive Compensation
and Benefits " Info Flash. " The posts
added that it is also very likely that compliance
with ERISA Section 404(c) will be an essential
defense in these cases.
Morningstar Shines Light on
Glide Path Issues
A July 2022 White Paper from The
Morningstar Center for Retirement &
Policy Studies found that despite large
differences in salaries and likely retirement
ages, plan sponsors tend to use similar glide
paths. TDF sponsors may expose individual
investors to increased risk by not tailoring
plan glide paths to their behavior.
The center reported that 58% of defined-contribution
plan assets are invested
in off-the-shelf TDFs. Many are designed
for participants to stay in the plan through
retirement, even when they are likely to roll
money out of the plan at retirement.
This mismatch could leave participants
overly exposed to equities later in their
careers because these " through " glide paths
typically take on more risk than " to " retirement
glide paths.
In light of this, the white paper's authors,
Lia Mitchell and Aron Szapiro, put forth a
trio of recommendations to the DOL to
help align TDF selection with participants'
needs more consistently:
1) Plan sponsors and advisors should
regularly consider the key assumptions
in their glide paths and their actual
experience with participant behavior,
as the DOL suggested in its guidance
in 2013.
2) The DOL should consider if more
guidance could help clarify the role that
sponsors need to play, particularly in
their review of and evaluation of glide
paths, given the differences we see across
sectors. The department could also recommend
plan sponsors consider TDFs
alongside other QDIA options.
3) The DOL should consider promulgating
additional guidance or even
amending the safe harbor on customized
glide paths and perhaps even
dynamic allocations between QDIA
options based on a participant's needs.
For its part, the DOL has been mostly
silent when providing additional TDF
guidance. It doesn't sit well with someone
like Surz, who thinks the regulator should
be doing more to protect 401(k) participants
from money managers who use risky
target-date investment strategies.
" The department needs to resurrect the
notion of putting some risk disclosures in
plans, because these are inherently risky products, "
Surz told Bloomberg in July. He penned
an open letter to the Employee Benefits
Security Administration soon after, in which
he said fiduciaries should be forced to make
an " explicit choice " between " safe " and " risky "
target-date investment strategies.
He's not particularly hopeful the DOL
will take action.
" I doubt the DOL will take my advice
unless I'm right about the harm to TDFs, so
public opinion forces the issue, " Surz said.
He added that a pending report from the
Government Accountability Office (GAO)
requested in 2021 by Sen. Patty Murray (DWA)
and Rep. Bobby Scott (D-VA) could
also prompt the DOL to do something. The
pair asked the GAO to examine the TDF
predominance, investment selection, marketing,
and future legislation or regulation
recommendations.
" I reached out to GAO, and they responded
that a response is targeted for September
2023, " he concluded, " which says to
me that it's not a high priority. "
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401(k) Specialist Issue 3 - 2022

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