September 1, 2022

Low-Cost Index Funds in the Crosshairs of New 401(k) Lawsuits

Holland & Knight Executive Compensation and Benefits Info Flash
John D. Martini | Todd D. Wozniak | Robert J. Friedman | Neely Pauley Munnerlyn | Ryan C. Meadows | Nicole F. Martini
Executive Compensation and Benefits Info Flash

Since late July, at least 10 lawsuits have been filed against large 401(k) plan sponsors that offer certain BlackRock Inc. target-date funds (TDF) among their investment options. In an unexpected pivot away from the 401(k) excessive fee litigation that has become increasingly common in recent years, the plaintiffs in each lawsuit allege that by selecting BlackRock's low-cost TDFs, the 401(k) plan sponsors breached their fiduciary duties when those funds underperformed. The plaintiffs in each lawsuit are seeking class action status.


A TDF is an investment option that automatically shifts its asset allocation from higher to lower risk as the investor nears his or her anticipated retirement year. The asset allocation glide path of a TDF begins with the majority of the fund being invested in equities, and as the retirement date approaches, that equity allocation decreases and the allocation in fixed-income investments increases. TDFs are generally viewed as safe investments, and they are often used by 401(k) plans as their default investment option. A "to retirement" TDF reaches its lowest risk asset allocation at the investor's year of retirement, and a "through retirement" TDF continues to lower its risk after reaching the year of retirement.

The Lawsuits

Each of the 401(k) plans involved in the lawsuits offered the target-date BlackRock LifePath Index Funds, which received the highest rating in the Morningstar 2022 Target-Date Landscape report. Despite this rating and the fact that TDFs are not meant to have the best performance of a 401(k) plan's investment options, the plaintiffs argue that plan fiduciaries failed to consider the BlackRock TDFs' return potential and instead only "chased the low fees" charged by the funds.

To illustrate the BlackRock TDFs' alleged underperformance, the plaintiffs compared the BlackRock TDFs' returns with the returns of TDFs offered by Vanguard, T. Rowe Price and American Funds. Those funds are not comparable to the BlackRock TDFs for two reasons:

  • Glide Path. The comparator TDFs selected by the plaintiffs are "through retirement" funds, while the BlackRock TDFs are "to retirement" funds. Because the comparator TDFs have a higher equity to fixed income allocation ratio through most of the life of the fund, those funds would be expected to outperform "to retirement" funds such as the BlackRock TDFs in rising markets, as the U.S. experienced during most of the last decade.
  • Management. The comparator TDFs are also actively managed, but the BlackRock TDFs are passively managed through investment in index funds. An actively managed fund is able to invest more in higher-return equities while the market is performing well. The goal of a passive fund, on the other hand, is more conservative. It does not aim to take advantage of every opportunity to increase its return and is instead intended to provide an investment option that is more resistant to market fluctuations. Passively managed TDFs typically charge lower fees than actively managed TDFs.


Although this series of lawsuits demonstrates 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 and provides necessary defenses should litigation arise. It is also very likely that compliance with Employee Retirement Income Security Act (ERISA) Section 404(c) will be an important defense in these cases.

If you are a 401(k) plan sponsor and would like assistance in evaluating your plan's investment selection and governance practices, ensuring that your plan complies with ERISA Section 404(c) or determining how these lawsuits might impact your plan, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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