A series of mutual funds launched in 2010 by Northern Trust and discontinued last year has ensnared three of Chicago’s largest publicly traded companies—including Northern itself—in litigation over inclusion of the funds in company-sponsored retirement plans.
Walgreens Boots Alliance settled a class-action suit in which use of Northern Trust’s underperforming Focus mutual funds was a centerpiece for $13.75 million late last year. More than $4 billion in Deerfield-based Walgreens’ profit-sharing plan for employees had been invested in Northern’s target-date funds, which are designed to match the risk of investment classes to how close a worker is to retirement age. Walgreens agreed as part of the settlement to pull the money from Northern’s funds.
Northbrook-based Allstate, too, was sued in late 2020 and again separately last year and alleged to have mismanaged its 401(k) fund, with use of Northern’s Focus funds also one of the main examples cited by the plaintiffs. Northern Trust doubles as the trustee of Allstate’s $7.1 billion 401(k) plan, so inclusion of Northern funds for plan participants is listed in filings as a “related-party transaction.”
Allstate is fighting the lawsuits, which have been consolidated and now are in discovery.
Now, Northern itself is facing a lawsuit filed a few months before the Walgreens settlement and alleging Northern shortchanged its own employees by, among other things, giving them only its own funds as their sole 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 rejected Northern’s motion to dismiss the suit.
In all the cases, the plaintiffs alleged that Northern’s funds performed significantly worse than the vast majority of target-date options from other asset managers.
For Northern’s own employees, the Focus funds not only were the only target-date choices available, but also were where Northern invested plan participants’ contributions if they didn’t specify anything, according to the complaint.
As one of the top asset managers in the country, as well as an administrator of retirement plans for institutional investors and top investment adviser for wealthy families, Northern long has preached the virtues of “open architecture” and steered clear of favoring its own investment funds over other better-performing choices.
As of the end of 2020, its 401(k) plan had $2.7 billion in assets, so the $464 million of that invested in the Focus funds accounted for about 17%. Northern earned management fees on those assets, making the retirement benefit for its employees a contributor to revenues and earnings.
Favoring in-house funds long has been a no-no in the investment business, particularly at firms like Northern that cater to the truly wealthy more than the more garden-variety rich, which the industry terms the “mass affluent.”
“This lawsuit is in the earliest stages,” Northern spokesman Doug Holt said in an email. “We believe it has no merit and we will vigorously defend against it.”
He didn’t comment on any of the specifics.
“Despite a market flush with better-performing alternatives, defendants selected the Northern Trust Focus Funds to be the plan’s target date asset class investment option,” according to the complaint in the lawsuit against Northern. “The Northern Trust Focus funds have significantly underperformed their benchmark indices and comparable target date funds since Northern Trust launched them in 2010. For nearly a decade, the Northern Trust Focus funds have performed worse than 70% to 90% of peer funds.”
The complaint added: “Based on an analysis of data compiled by Morningstar, plaintiffs project the plan lost tens of millions of dollars in retirement savings since 2015 because of defendants’ decision to retain the Northern Trust Focus funds in the plan instead of removing them.”
The Walgreens, Allstate and Northern retirement plans combined to generate the vast majority of assets in Northern’s Focus funds, according to filings. The funds held $6.7 billion in assets as of the end of 2020, according to Morningstar Direct. The Walgreens plan accounted for more than $4 billion of that while the Allstate plan contributed $859 million and Northern’s plan $464 million.
The funds were liquidated in October of last year, according to Morningstar Direct. Allstate switched the target-date funds in its 401(k) plan to a series run by Northern’s archrival, Boston-based State Street, in September 2021, according to a filing. Northern moved its plan’s target-date offerings to a family overseen by New York-based BlackRock, according to a filing.
Target-date funds have proven to be a popular retirement strategy over the past 15 years or so, in part because investors don’t have to decide how to allocate their assets among, say, small-cap stocks, large-cap stocks, fixed income and other options. The funds handle that part automatically based on workers’ time horizons for needing the money. Every five years a worker who uses the target-date approach is switched into a new fund with a different risk profile. There’s close to $1 trillion collectively invested in target-date funds in the U.S.