At $1 trillion and growing, target date funds are the most popular qualified default investment alternative (QDIA) in 401(k) plans, yet most fiduciaries are not vetting their target date funds (TDF) selection, opting instead to use their bundled service providers out of convenience and familiarity rather than excellence. This breach of fiduciary responsibility invites lawsuits.
According to a recent Morningstar report “The industry’s market leaders—Vanguard, Fidelity, and T. Rowe Price—maintain their hold on the industry. The three still control about three fourths of the industry’s assets.”
Fiduciaries foolhardily rely on certain safe harbors described below that lead to unintended breaches of the duty of care. The fiduciary duty of care requires a sincere effort to select the best and to protect beneficiaries from foreseeable harm. This duty is like the obligation to protect your children. It’s more than a legal requirement; it’s a moral imperative. Importantly, it requires documented affirmative action.
Dangerous False Beliefs
Fiduciaries, namely plan sponsors and their advisors, unwittingly breach their duty of care because they mistakenly believe that they are protected from litigation by two safe harbors in their selection of target date funds:
- TDFs are Qualified Default Investment Alternatives (QDIAs) under the Pension Protection Act (PPA) of 2006. Form over substance.
- There is safety in numbers, so choosing one of the most popular TDF providers is prudent. You can’t go wrong with Fidelity, T. Rowe Price and Vanguard. Or can you? Popularity is not necessarily prudent. Cigarette smoking used to be popular.
These beliefs will not hold up in court. The PPA does not say that any QDIA will do, and it certainly does not relieve fiduciaries of their duty of care. Also, “safety in numbers” is a “misery loves company” view, whereas “no misery” is a far better choice.
Smarter and Safer
When the next 2008 occurs, class action lawsuits will remedy violations of the duty of care by holding offending fiduciaries liable for excessive losses so don’t wait to perform your duty. Good intention, or so-called “empty head and good heart,” is no excuse.
Choosing the Big 3 would be just fine if they were the best for your plan’s beneficiaries, but first you need to determine what is best, which isn’t easy.
That’s why we wrote a book to help fiduciaries select target date funds, described at Fiduciary Handbook.