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Suit Challenges ‘Good Hands’ of Allstate 401(k) Plan Fiduciaries

Fiduciary Rules and Practices

Another multibillion-dollar 401(k) has been targeted in a fiduciary breach suit—but this time the focus isn’t fees, but the choice of target-date funds, and their alleged “abysmal underperformance.”

The suit (Cutrone v. Allstate Corp., N.D. Ill., No. 1:20-cv-06463, complaint 10/30/20) has been filed against “the Allstate Corporation, the Allstate 401(k) Committee, the Allstate 401(k) Administrative Committee, the Allstate 401(k) Investment Committee, and these committees’ members” by ex-participant Katherine Cutrone, individually and as representative of a class of participants and beneficiaries of the $5 billion Allstate 401(k) Savings Plan, which the suit claims has some $763 million invested among 11 Northern Trust Focus Funds.

The suit—filed on behalf of plaintiff Cutrone by Scott+Scott Attorneys at Law LLP and Law Offices of Michael M. Mulder—claims that the defendants “did not effectively use” the leverage of a large plan “to identify and select prudent target date options for Plan participants.” Rather, the suit claims that “despite a market flush with better-performing alternatives, Defendants selected the Northern Trust Focus Funds to be the Plan’s target date asset class investment option,” funds that the plaintiff claims “significantly underperformed their benchmark indices and comparable target date funds since Northern Trust launched them in 2010.” 

‘Peer’ Review

More specifically, the suit alleges that, “for nearly a decade, the Northern Trust Focus Funds have performed worse than 70% to 90% of peer funds.” A misstep the suit claims made worse by the designation of those funds as the plan’s default investment alternative—all in all, the plaintiff “projects the Plan lost upwards of $65 million in retirement savings since 2014 because of Defendants’ decision to retain the Northern Trust Focus Funds in the Plan instead of removing them.”

Now, of course, the suit comments that the “plaintiff did not have knowledge of all material facts (including, among other things, comparisons of the Plan’s investment performance relative to other available investment alternatives) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before filing this Complaint,” nor did she “…have actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plan, including Defendants’ processes for monitoring and removing Plan investments, because this information is solely within the possession of Defendants prior to discovery.” That said, and having stated that for purposes of establishing a starting point for purposes of the statute of limitations, the plaintiff claims to have “drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth herein.”

‘Comparator’ Comparisons

Most of the 43-page filing is dedicated to a detailed comparison (from Jan. 1, 2014 through June 30, 2020 on an annualized basis) of each of the individual Northern Trust Focus Funds against alternatives (“comparators”) the suit says Morningstar grouped in the same category; target date funds offered by American Funds, T. Rowe Price and Vanguard. By way of explanation, the suit notes that “each investment adviser for the Comparators Funds is an industry leader capable of providing target date strategies to large 401(k) plans like the Plan here. Each of the Comparator Funds outperformed the Northern Trust Focus Funds between 2010 and 2013. Still, Defendants selected Northern Trust for the Plan instead of the Comparator Funds.”

The suit notes that this decision resulted “collectively speaking, in a swift and devastating blow to Plaintiff’s and other Plan participants’ retirement accounts.”

Moreover, the suit states that “the Comparator Funds listed in the tables below (American Funds, T. Rowe Price and Vanguard) pursue the same investment objectives as the Northern Trust Focus Funds, are managed by well-known investment advisers, and are available to all large retirement plans. Defendants would not have had to scour the market to find them.”

In sum, the suit alleges that defendants “breached their fiduciary duties through their imprudent process for investigating, evaluating, and monitoring investments. The faulty process resulted in a plan loaded with the Northern Trust Focus Funds that have exhibited chronic poor performance for almost a decade. Defendants failed to remove the Funds despite their historical underperformance relative to other target date collective investment trusts and relevant benchmark indexes.” 

The suit also challenged the lack of oversight of the individuals making those decisions on behalf of the plan, specifically for “failing to monitor their appointees, to evaluate their performance, or to have a system in place for doing so, and standing idly by as the Plan suffered enormous losses as a result of their appointees’ imprudent actions and omissions with respect to the Plan.”

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.