The plaintiffs are participants in Kraft’s defined contribution plan, which had assets ranging from $1.5 billion to $5.4 billion between 1994 and 2010. They brought a class action alleging that Kraft and others breached their fiduciary duty by including two actively managed funds, a Growth Equity Fundand a Balanced Fund, among the investment options available to plan participants.The consultants to the plan only considered funds with a minimum seven year track record, with at least $500 million under management. They focused on the past returns of the funds selected, which were the primary determinant.
This focus on past performance is typical of the way actively managed funds are selected, even though (as everyone except consultants to benefit plans is aware) past performance is not predictive of future performance. One study looked at hiring and firing decisions by 3,700 plan sponsors (public and corporate pension plan, unions, foundations and endowments) over a 10 year period from 1994 to 2003. Three years prior to hiring, the fund managers selected all had stellar records of beating their benchmarks. Post hiring excess returns were zero or less.
This case is an excellent representation of how retirement plans are sold to many plan sponsors. I have taled with many advisers who boast of their “26 point check list” when screening mutual funds. These screenings are for the most part worthless.
Please comment or call to discuss how this affects you and your compoany plan.
- Dan Solin: 3.5 Billion Reasons Why Your 401(k) Plan Is a Loser (huffingtonpost.com)
- The Media Needs Actively Managed Funds (moneyning.com)
- Smart Investor – Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans (401kplanadvisors.com)