United States: Walgreens' Target Date Fund Complaint Illustrates Need For Prudent Target Date Review Process

This August, participants in Walgreens' 401(k) plan, a $10 billion plan with approximately 130,000 participants, filed a class action lawsuit focusing on the Northern Trust Focus Target Retirement Trusts, the plan's target date fund series. The funds comprise approximately 30% of the plan's assets, and the participants are seeking more than $300 million in damages. The complaint provides an important illustration of the need to have a well-documented target date fund review process.

The participants bringing the lawsuit point to a number of factors that they suggest point to an inadequate selection and review process by the Walgreens plan fiduciaries. In particular, the plaintiffs allege that:

• The funds were first offered in 2010. Since their inception, they have generally performed in the bottom tenth to thirtieth percentile of target date funds.
• The selection of the funds by the Walgreens plan fiduciaries in 2013, given their performance, allegedly shows that the plan fiduciaries did not prudently compare the funds to other available options and to their benchmarks.
• The plan fiduciaries have continued to utilize the funds and add new funds in the series as they became available despite the ongoing performance issues of the funds, allegedly illustrating the failure of the plan fiduciaries to monitor the funds.

Although this case is still in the initial complaint stage, the complaint demonstrates the need for plan fiduciaries to document their target date review process. The complaint, in particular, focuses on the performance of the funds. However, in addition to reviewing the performance and fees of target date funds annually, plan fiduciaries should also review:

• The glide path of the target date funds and how it compares to peers;
• The asset allocation and underlying holdings of the funds;
• The continued appropriateness of the funds taking into account participant demographics and the availability of other plans; and
• The investment strategy of the funds.

Given that target date funds are typically the largest investment in most defined contribution plans, we anticipate that the plaintiffs' bar will continue to seek out opportunities to sue plan fiduciaries based on alleged deficiencies in their target date selection and review process. As a result, we recommend that plan fiduciaries ensure they conduct a detailed review of their target date funds annually.

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