A judge in an Arizona federal district court has denied Discount Tire Co.’s motion to dismiss in an Employee Retirement Income Security Act (ERISA) lawsuit that challenged target-date funds in the company’s 401(k) plans. The plaintiffs claim that Discount Tire breached its fiduciary duty under ERISA by retaining funds that repeatedly underperformed as investment options in its retirement plan.
A former plan participant filed a proposed class action against Reinalt-Thomas Corporation, Discount Tire’s parent company, and its board of directors, alleging breach of fiduciary duty under ERISA. The lawsuit challenges the company’s continued offering of the American Century Target Fund Suit in its 401(k) plan, which has about 16,000 employee participants. Over 40% of the plan’s total assets, which amount to almost $519.5 million, were invested in American Century at the time the lawsuit was filed.
The plaintiffs portray the American Century funds among the worst-performing target-date fund suites available. The funds reported have underperformed benchmarks for at least 15 years and have underperformed most funds over the last 10 years. According to the plaintiffs, these investments have caused plan participants to lose between $11 and $44 million in their retirement savings.
Senior U.S. District Judge Douglas L. Rayes rejected the company’s motion to dismiss the suit, finding that the plaintiffs had sufficiently identified multiple target-date fund suites, such as those from American Funds, Fidelity, and State Street, to use as benchmarks for evaluating the reasonableness and prudence of the investment decisions by plan fiduciaries. The judge found that the plaintiffs’ comparisons to other funds formed a sufficient basis for their fiduciary imprudence claim under ERISA, at least at the pleading stage.
ERISA makes plan fiduciaries who breach their duties personally liable to the plan for any losses related to the breach. As a result, plan fiduciaries found liable for losses must restore any profits realized from the usage of plan assets. A court can order equitable or remedial relief in a breach of fiduciary duty claim, including removal of the fiduciaries if necessary. Other available remedies include reasonable attorney’s fees and costs for either party in a claim filed by a participant, beneficiary, or fiduciary.
The district court’s decision to allow the lawsuit to proceed could make a settlement more likely. While its decision on the motion to dismiss does not establish liability, it indicates that fiduciary decisions to retain investment options despite prolonged underperformance relative to similar options may increasingly come under scrutiny in ERISA cases.
As a result, plan fiduciaries should regularly conduct investment option reviews for their plans. If target-date funds or other investment options consistently underperform comparable funds and benchmarks over multiple years, fiduciaries may be subject to ERISA claims.
The denial of the company’s motion to dismiss also underscores the importance of comparing similar funds when assessing the propriety of fiduciary conduct. Courts may find plaintiffs’ claims more legitimate when they establish a framework for evaluating fiduciary actions under ERISA’s prudence standard by identifying specific comparable funds with much better performance. The outcome in this case may affect how plan sponsors should responsibly monitor, assess, and make investment decisions.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
