Here’s what’s happening — and what every plan sponsor, consultant, and fiduciary should take to heart.
What the Facts Say
IBM’s 401(k) plan is under fire. A lawsuit alleges that the plan fiduciaries retained proprietary target-date funds (TDFs) and target-risk funds — the “Life Cycle Suite” — that underperformed comparable peer funds by as much as 20–30 percentage points over various vintages. About one-fifth of the plan’s $60 billion in assets — roughly $13.4 billion — were invested in those proprietary funds.
The complaint argues that the benchmarks used were “custom” benchmarks that compared the funds to themselves or to other in-house constructs rather than to true peer funds, making them misleading. Plaintiffs claim those imprudent selections cost participants around $1.9 billion in lost returns.
My Take
Folks — if you’ve been saying “we have a process” and checking boxes, this case demands your full attention. Because when participants lose not because of a market crash but because of the plan’s own construction, the ERISA war horn blows.
Let me say it bluntly: the plan sponsor lived by the mantra “default into the house brand,” while the house brand quietly underperformed every credible outside alternative. If I had been in that boardroom, right about the moment someone asked, “why do we use our own funds rather than the low-cost, high-performing peer alternatives?” I’d have raised my hand and asked, “where’s the fiduciary memo?”
Let’s break down the key red flags:
· Proprietary fund dominance: When a plan’s default lineup leans heavily on its own brand, you must ask if this benefits participants or simply keeps fees in-house.
· Custom benchmarks: Fancy benchmarks may make you look good on paper — until they don’t. A benchmark only works if it’s a fair reflection of the real market.
· Comparative underperformance: When your target-date fund is returning 57% while peers are earning 74% or 88%, you’ve got a serious fiduciary problem.
· Disclosure, monitoring, and governance: Failing to review alternatives or swap out underperformers is exactly what ERISA litigation thrives on.
Why This Matters for the 401(k) Industry
For plan sponsors and service providers, the IBM case isn’t just another lawsuit — it’s a mirror. Even the biggest, most sophisticated plans aren’t immune from fiduciary missteps. The lesson is clear: process isn’t paperwork. It’s active oversight, genuine benchmarking, and a willingness to challenge your own assumptions.
Too often, large plans build their own fund suites and assume that “internal equals efficient.” But when participants see years of lagging returns, efficiency turns into liability.
Lessons for Plan Sponsors
1. Revisit your default funds. Don’t assume “house” means best.
2. Scrutinize benchmarks. Make sure they reflect a fair comparison.
3. Document decisions. Meeting minutes and due diligence memos are your best defense.
4. Prioritize outcomes. Participants care about results, not branding.
5. Act when evidence demands it. Delaying fund changes only compounds risk.
Final Word
This isn’t just about IBM. It’s about every sponsor who believes their internal process is beyond question. Fiduciary complacency is the quiet killer of participant outcomes.
As I often tell clients: you can’t call yourself participant-focused if your plan lineup consistently underperforms. Fiduciary duty means putting participants first — even when that means questioning your own products.
