In a list of the most important factors driving
decision-making at defined contribution plans, litigation risk
ranked second only to meeting participant retirement goals.
A quarter of DC consultants surveyed by PIMCO rated avoiding fiduciary
lawsuits as the most important consideration of their clients,
compared with 29 percent who chose retirement outcomes.
Of these consultants, who collectively advise on more than
$4 trillion in DC assets, 84 percent recommended that clients
compare plan costs with those of peers as one way to manage
fiduciary risk. Another 55 percent said plan sponsors should
avoid funds that charge performance fees.
Evaluation of fees and costs is expected to be a top
priority for defined contribution plans this year. Consultants
ranked studies of investment fees, plan costs, and
administration fees among their top four client priorities;
reviewing target-date funds, which the retirement plans of
Wells Fargo and Safeway were each sued over last year after
participants said funds were too expensive, ranked first.
The consultants have reason to be concerned over potential
litigation. In recent years, DC plan sponsors including Intel,
Boeing, and MassMutual have been sued for reasons ranging from hedge fund
allocations to lack of transparency to fees. Even university
403(b) plans have become the target of litigation, with a slew
of top schools including Duke, Vanderbilt, and Yale sued late
last summer for failing to uphold their fiduciary duty.
In any case, target-date funds remain by far the most
popular fund structure for DC participants, with 97 percent of
consultants recommending them as the default option for
Stacy Schaus, the PIMCO executive who authored the survey,
said in a statement that nearly all consultants cited target
date glide paths a funds changing mix of
investments over time as the most important factor in
choosing a default investment strategy.
Consultants also note fees as an important
consideration, which helps explain broad support for active and
passive-blend target-date strategies, she added.
As for addressing their legal fears, some plan sponsors have found
comfort in outsourcing responsibilities to consultants,
according to PIMCO. Currently, consultants said 12 percent of
their clients used discretionary services, a number they
expected to grow to 18 percent over the next three years.
Perceived mitigation of fiduciary risk ranked as the highest
motivation for using an outsourced-CIO, chosen by 85 percent of
But even the OCIO model isnt a safe haven from
lawsuits: 52 percent of consultants said litigation risk was
the highest hurdle to growing their discretionary services.