District Court Dismisses Two ERISA Lawsuits Challenging BlackRock TDFs

A judge in the U.S. District Court for the Eastern District of Virginia last week dismissed two lawsuits brought against two plan sponsors under the Employee Retirement Income Security Act. The suits had been brought against Capital One and Booz Allen Hamilton for using a BlackRock target-date fund series as their qualified default investment alternative.

Both employers are represented by Morgan, Lewis and Bockius LLP. They filed for dismissal in October for failure to state a claim, and the suits were dismissed without prejudice on December 1. The plaintiffs, represented by Miller Shah LLP, have two weeks to amend their complaint.

Miller Shah is currently representing clients in 11 lawsuits against plan sponsors that offer the BlackRock Lifepath Index Suite, a series of TDFs, as their QDIA. The core claims in all the suits are essentially the same. The plaintiffs have argued that the plan sponsors sought low fees in selecting the BlackRock TDFs without monitoring the overall performance of the funds in relation to other higher performing funds and therefore both violated their ERISA fiduciary duties of prudence and loyalty and damaged plan participants’ retirement savings.

The 11 defendants include employers such as Microsoft, Cisco, CitiGroup, Wintrust and Advance Publications.

James Miller, a partner at Miller Shah, says the firm and its clients are still evaluating their option to refile in the cases against Capital One and Booz Allen, but he considers it likely. The dismissal was a consequence of courts that do not have a full understanding of the investment products and the way advisers and fiduciaries evaluate 401(k) investments, he said.

The BlackRock suits brought by Miller Shah have been panned by industry actors and watchers as absurd and even bad faith. The arguments found in the defendants’ briefs and in amicus briefs note that the BlackRock TDF offering is the top-rated TDF series according to Morningstar, which rates investment products. If the BlackRock series can be challenged, say its supporters, then any plan could be sued.

Supporters of the BlackRock TDFs also note that those funds use a more conservative investment strategy than other TDFs, so their relative underperformance in a bull market is not a shock, since it is designed to protect investors more during bear markets.

Miller argues that Morningstar ratings only take into account qualitative factors such as the credentials of fund advisers, rather than their actual investment performance. BlackRock underperformed its comparators, according to the suits brought by Miller Shah.

Detractors of the suits argue that the comparators used by the plaintiffs are not suitable for a variety of reasons. Some are actively managed, while the BlackRock funds are passive, and some funds might be more risk-averse than others. Miller also argues that TDFs should not be able to use their own benchmarks as the only metric of comparison of their investment performance, saying those benchmarks are designed to be exceeded. He agrees that U.S. courts have not been very clear on establishing criteria for comparators.

Miller says some defendants in oral arguments have argued that the only fair comparator for the investment performance of a TDF is the same investment in a different share class, which he says would be too narrow, to the point of absurdity.

The attorneys representing Capital One and Booz Allen Hamilton did not return a request for comment.

The other nine suits brought by Miller Shah concerning the BlackRock TDFs are ongoing.