Another Lawsuit Scrutinizes Use of Active TDF Suite in 401(k) Plan

A participant of the Prime Healthcare Services Inc. 401(k) Plan has filed a proposed class action lawsuit against Prime Healthcare Services and its 401(k) plan committee alleging they failed to fully disclose the expenses and risk of the plan’s investment options to participants; selected and retained high-cost, poorly performing investment options; and allowed unreasonable expenses for recordkeeping.

A considerable amount of space in the complaint is dedicated to challenging the plan’s offering of the Fidelity Freedom Funds target-date fund (TDF) suite. The lawsuit alleges that the defendants failed to compare the actively managed Fidelity Freedom Funds to the passively managed Freedom Index Funds TDF suite and consider their respective merits and features. The complaint says the actively managed TDF suite was riskier and more expensive than the index suite.

In addition, the plaintiff says the defendants’ violation of their Employee Retirement Income Security Act (ERISA) fiduciary duties was exacerbated by the fact that they chose the Fidelity Freedom Funds as the plan’s qualified default investment alternative (QDIA) for as long as it was an option on the plan investment menu. The fact that plan participants were defaulted into the TDF suite meant that it held a large amount of participants’ assets, the complaint states.

The lawsuit delves into the underlying investments and glide path of the TDF choices, and says the active suite allocates approximately 1.5% more of its assets to riskier international equities than the index suite. The active suite also has higher exposure to classes such as emerging markets and high yield bonds.

The fees charged by the active suite are many multiples higher than the index suite’s “industry-leading low costs,” the complaint states. “While the Institutional Premium share class for each target year of the index suite charges a mere 8 basis points [bps] (0.08%), the active suite has expense ratios ranging from 47 basis points (0.47%) to 75 basis points (0.75%).”

The lawsuit also claims that using a start date of January 1, June 30, or December 31, 2014, the index suite has outperformed the active suite to date.

The lawsuit calls out what it says are “additional objectively imprudent investment options.” These include the Invesco Real Estate Fund, the T. Rowe Price Mid-Cap Value Fund, the Oakmark Equity and Income Fund, and the Prudential Jennison Small Company Fund. The Prudential option was replaced in mid-2019, but the lawsuit says the defendants “were far too late in eliminating this fund as an investment option.”

A Prime Healthcare spokesperson told PLANADVISER: “The allegations are baseless. Prime Healthcare will vigorously defend itself and is confident it will prevail. This is unfortunately a very common opportunistic lawsuit that certain plaintiff lawyers have been filing against many large employers.”