PLANADVISER - Winter 2023 - 34
The Risks of Custom TDFs
A case probes when it may be prudent to pull an investment
HOW QUICKLY does a fiduciary have to remove an underperforming
investment from its plan's investment menu?
And under what circumstances can custom funds be
deemed imprudent? Melina Jacobs v. Verizon Communications, a
case brought before the U.S. District Court for the Southern
District of New York in 2016, took on these questions.
The suit, like many brought under the Employee Retirement
Income Security Act, was settled out of court-in this
case, after seven years of litigation. Although settlements
do not carry the force of precedent or contribute to case law,
the case still offers some thought-provoking insights into
these questions.
The Case
In February 2016, Melina Jacobs brought a complaint under
ERISA alleging that her former employer maintained investments
on its defined contribution plan menu that underperformed
and had excessive fees.
Specifically, the suit alleged that Verizon maintained
custom " funds of funds, " including a custom target-date
fund suite, that carried " excessive risk and redundant
layers of fees " and underperformed " off-the-shelf " TDFs.
The complaint cited a Vanguard managed suite as an
example of a target-date fund that had lower fees and
higher performance than did the Verizon custom suite
over the class period, starting in 2010.
The investments, the plaintiff alleged, underperformed
partly because of their complexity and partly because of
their customized nature-both of which drove up management
fees-but also because Verizon failed to adequately
monitor the component funds within each investment.
The Global Opportunity Fund, one fund within many
of the custom funds, was identified in particular by the
plaintiff for underperforming its benchmark over several
years and should have been removed, the complaint said.
According to its prospectus, the Global Opportunity Fund
is an actively managed global equity value fund that uses a
strategy aiming to " add value, relative to its benchmark, by
investing in the most attractive markets on a global basis,
while simultaneously underweighting, or shorting, markets
that are viewed by the fund managers as overvalued. "
The lawsuit characterized these funds as a " multidimensional
labyrinth of actively managed 'custom' investment
choices. "
In response, Verizon filed a motion to dismiss, which
was denied in September 2017.
The court ruled that the factual allegations in the
complaint were adequate to state a claim: " The Complaint
pleads that the Verizon defendants kept-as a 'core asset'
most of the Verizon Plans' investment options-a fund that
34 planadviser.com | Winter 2023 | Plan Management Art by Pete Ryan
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PLANADVISER - Winter 2023
Table of Contents for the Digital Edition of PLANADVISER - Winter 2023
Publisher’s Note
Just the Facts
On the Move
Nuts & Bolts
What’s Next?
Best Foot Forward
2023 PLANADVISER National Conference
Cybersecurity Conference
Let It Ride
Cultivating Connections
The Risks of Custom TDFs
Managed Account Services
People-Savvy
Be Sure They Get the Message
End Paper
PLANADVISER - Winter 2023 - Cover1
PLANADVISER - Winter 2023 - FC1
PLANADVISER - Winter 2023 - FC2
PLANADVISER - Winter 2023 - Cover2
PLANADVISER - Winter 2023 - 1
PLANADVISER - Winter 2023 - Publisher’s Note
PLANADVISER - Winter 2023 - 3
PLANADVISER - Winter 2023 - Just the Facts
PLANADVISER - Winter 2023 - 5
PLANADVISER - Winter 2023 - 6
PLANADVISER - Winter 2023 - 7
PLANADVISER - Winter 2023 - On the Move
PLANADVISER - Winter 2023 - 9
PLANADVISER - Winter 2023 - 10
PLANADVISER - Winter 2023 - 11
PLANADVISER - Winter 2023 - Nuts & Bolts
PLANADVISER - Winter 2023 - 13
PLANADVISER - Winter 2023 - What’s Next?
PLANADVISER - Winter 2023 - 15
PLANADVISER - Winter 2023 - 16
PLANADVISER - Winter 2023 - 17
PLANADVISER - Winter 2023 - 18
PLANADVISER - Winter 2023 - Best Foot Forward
PLANADVISER - Winter 2023 - 20
PLANADVISER - Winter 2023 - 21
PLANADVISER - Winter 2023 - 2023 PLANADVISER National Conference
PLANADVISER - Winter 2023 - 23
PLANADVISER - Winter 2023 - 24
PLANADVISER - Winter 2023 - 25
PLANADVISER - Winter 2023 - Cybersecurity Conference
PLANADVISER - Winter 2023 - 27
PLANADVISER - Winter 2023 - Let It Ride
PLANADVISER - Winter 2023 - 29
PLANADVISER - Winter 2023 - 30
PLANADVISER - Winter 2023 - 31
PLANADVISER - Winter 2023 - Cultivating Connections
PLANADVISER - Winter 2023 - 33
PLANADVISER - Winter 2023 - The Risks of Custom TDFs
PLANADVISER - Winter 2023 - 35
PLANADVISER - Winter 2023 - Managed Account Services
PLANADVISER - Winter 2023 - 37
PLANADVISER - Winter 2023 - People-Savvy
PLANADVISER - Winter 2023 - Be Sure They Get the Message
PLANADVISER - Winter 2023 - End Paper
PLANADVISER - Winter 2023 - Cover3
PLANADVISER - Winter 2023 - Cover4
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