Northbrook-based Allstate was also sued in late 2020 and again separately last year and allegedly mismanaged its 401(k) fund, with the use of Northern’s Focus funds also being one of the main examples cited by the plaintiffs . Northern Trust also serves as trustee of Allstate’s $7.1 billion 401(k) plan, so the inclusion of Northern funds for plan participants is listed in the documents as a “party transaction.” linked”.
Allstate is fighting the lawsuits, which have been consolidated and are now in discovery.
Now Northern itself faces a lawsuit filed months before the Walgreens settlement alleging Northern wronged its own employees by, among other things, giving them only its own funds as the only target date option in its 401(k) plan. Chicago-based U.S. District Court Judge Charles Norgle, who also handled the Walgreens case, earlier this month denied Northern’s motion to dismiss the lawsuit.
In all cases, the plaintiffs – employees or former employees – alleged that Northern’s funds performed significantly worse than the vast majority of target date options from other asset managers. All of the lawsuits seek class action status, potentially affecting all plan workers.
For Northern’s own employees, the Focus funds were not only the only target date choices available, but were also where Northern invested plan participants’ contributions if they did not specify anything, according to the complaint.
As one of the nation’s top asset managers, as well as a pension plan administrator for institutional investors and a leading investment adviser for wealthy families, Northern has long preached the virtues of “l ‘open architecture’ and avoided favoring its own investment. funds compared to other better performing choices.
At the end of 2020, his 401(k) plan had $2.7 billion in assets, so the $464 million invested in Focus funds was about 17%. Northern earned management fees on these assets, making its employees’ pension benefit a contributor to revenue and profit.
Favoring internal funds has long been a no-no in the investment industry, especially at companies like Northern that cater to the truly wealthy more than the wealthy of the garden variety, which the industry calls the “rich masses”.
“This trial is still in its early stages,” Northern spokesman Doug Holt said in an email. “We believe this has no merit and we will vigorously defend against it.”
He did not comment on the details.
“Despite a market filled with better-performing alternatives, the defendants chose the Northern Trust Focus Funds as their investment option in the plan’s target date asset class,” according to the complaint in the lawsuit against Northern. “Northern Trust Focus Funds have significantly underperformed their benchmarks and comparable target date funds since Northern Trust launched them in 2010. For nearly a decade, Northern Trust Focus Funds have underperformed 70% to 90% of peer funds.”
The complaint added: ‘Based on an analysis of data compiled by Morningstar, the plaintiffs anticipate that the plan has lost tens of millions of dollars in retirement savings since 2015 due to the defendants’ decision to hold onto the funds. Focus Northern Trust in the plan instead of deleting them. ”
The Walgreens, Allstate and Northern pension plans combined to generate the bulk of assets for Northern’s Focus funds, according to filings. The funds held $6.7 billion in assets at the end of 2020, according to Morningstar Direct. The Walgreens plan was worth more than $4 billion, while the Allstate plan contributed $859 million and Northern’s plan contributed $464 million.
The funds were liquidated in October last year, according to Morningstar Direct. Allstate replaced target-date funds in its 401(k) plan with a series run by Northern’s arch-rival, Boston-based State Street, in September 2021, according to a filing. Northern transferred its plan’s target date deals to a New York-based BlackRock-supervised family, according to a filing.
Target date funds have proven to be a popular retirement strategy over the past 15 or so years, in part because investors don’t have to decide how to allocate their assets between, say, small cap stocks, large-cap, fixed-income, and other options. The funds manage this part automatically according to the time horizons of the workers to need the money. Every five years, a worker who uses the target date approach is transferred to a new fund with a different risk profile. There is nearly $1 trillion collectively invested in target date funds in the United States