Microsoft Failed to Prudently Manage Retirement Plan Assets, Class Action Alleges

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A proposed class action alleges Microsoft Corporation, its board of trustees and the administrative committee for the company’s 401(k) plan have failed to prudently manage the plan’s assets.

The 44-page lawsuit says that given the size of the Microsoft Corporation Savings Plus Plan, with over 135,250 participants and assets totaling roughly $38.34 billion as of December 2020, the defendants had “significant bargaining power” to demand low-cost administrative and investment management services and ensure that the plan had “prudent and diverse” investment options. According to the suit, however, the defendants have breached their fiduciary duties to the plan by selecting poorly performing investment options over more prudent alternatives.

The case claims that Microsoft’s failure to act as a prudent fiduciary is a violation of the Employee Retirement Income Security Act (ERISA) and has caused plan participants and beneficiaries to lose millions of dollars in retirement savings.

At issue in the complaint is a suite of BlackRock LifePath Index funds that have allegedly been offered as part of the Microsoft 401(k) plan since at least December 2009. The lawsuit alleges that this group of 10 target date funds has “dramatically, repeatedly underperformed” the average return of the most comparable target date funds available throughout the relevant timeframe and thus “could not have been justifiably retained in the Plan.”

Had the defendants prudently evaluated the performance of the BlackRock target date funds and the available alternatives, they would have removed the funds as an investment option and replaced them with better-performing mutual funds, the lawsuit alleges.

“Defendants were responsible for crafting the Plan lineup and could have chosen from a wide range of prudent alternative target date families offered by competing [target date fund] providers, which are readily available in the marketplace, but elected to retain the BlackRock [target date funds] instead, an imprudent decision that has deprived Plan participants of significant growth in their retirement assets,” the complaint contends, alleging Microsoft “appear[ed] to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return.”

As the suit tells it, the defendants “compounded their imprudent decisions” to offer the BlackRock target date funds as investment options by designating the funds as the plan’s qualified default investment alternative, i.e., the investment option in which plan participants’ contributions are automatically invested if they do not indicate otherwise. The case says that since “the vast majority” of the Microsoft plan’s participants are not sophisticated investors, many of them ended up investing in the BlackRock funds by default. Indeed, roughly 24 percent of the plan’s assets, aside from those invested in Microsoft common stock, were invested in the BlackRock target date funds by December 2020, the suit relays.

The lawsuit alleges the BlackRock target date funds’ “consistently deplorable performance” should have been apparent to the defendants, which suggests that they failed to properly scrutinize the funds’ performance in comparison to available alternatives. As a result, the suit says, plan participants and their beneficiaries have lost out on “substantial investment returns” that they would have achieved had the plan invested in more prudent options.

The case looks to represent all participants in and beneficiaries of the Microsoft Corporation Savings Plus Plan at any time from August 2, 2016 through the date of judgment in the case (or any earlier date that the court determines is appropriate), including beneficiaries of deceased persons who were plan participants during that timeframe.

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