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A recently filed proposed class action lawsuit against IBM's 401(k) plan fiduciaries highlights the importance for 401(k) plan fiduciaries to carefully select and monitor 401(k) plan investment options, especially the plan's target date fund. The lawsuit alleges that plan fiduciaries breached their fiduciary duties of prudence and loyalty by retaining several underperforming funds, including a suite of proprietary target-date and target-risk funds, and three Vanguard mutual funds. The lawsuit alleges that the underperforming funds cost plan participants $1.9 billion in returns compared to alternative funds, and the underperformance was obscured by the plan fiduciaries using custom benchmarks to monitor the proprietary target-date funds' performance.
At this early stage, the court has yet to rule on the lawsuit, so it is unknown whether it has merit. However, even without a ruling by the court, this new lawsuit highlights the importance for plan fiduciaries to carefully select, and regularly monitor, all plan investment options. In addition, custom proprietary funds may attract scrutiny from plaintiffs lawyers. While there is nothing inherently problematic with a large 401(k) plan utilizing proprietary investment funds, such funds may merit additional scrutiny because of the potential for (i) high fees, (ii) difficulty benchmarking performance, (iii) participant confusion, and (iv) making the plan's relationship with the investment manager stickier than usual.
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