Capital One Chose Poorly Performing Investments for Employee Retirement Plan, Lawsuit Says

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Capital One faces a proposed class action that alleges the bank mismanaged its employee retirement plan by retaining a suite of poorly performing target date funds as investment options.

The 47-page lawsuit alleges Capital One Financial Corporation, its board of trustees and the benefits committee for the bank’s defined contribution savings plan have breached their fiduciary duties to plan participants and robbed them of millions in retirement savings they would have received had the defendants chosen prudent investments for the plan’s assets.

The case says the Capital One retirement plan, with over 60,800 participants and approximately $7.85 billion in assets as of December 2020, is among the top 0.1 percent of all defined contribution plans by size. As such, the defendants had “significant bargaining power” to negotiate for low-cost recordkeeping and administrative services and ensure that the plan’s investment options remained “prudent and diverse,” the suit contends.

The lawsuit alleges, however, that Capital One has selected and retained a suite of BlackRock LifePath index funds as part of the plan’s investment lineup, despite the fact that the group of 10 target date funds (TDFs) is “significantly worse performing” than many comparable alternatives. According to the case, an analysis of the BlackRock target date funds’ performance in comparison to other TDF suites would have “raised significant concerns” to a prudent fiduciary and indicated that the funds’ retention in the plan was not justifiable.

“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 TDF providers, which are readily available in the marketplace, but elected to retain the BlackRock TDFs instead, an imprudent decision that has deprived Plan participants of significant growth in their retirement assets,” the complaint argues. 

Per the suit, the defendants may have “chased the low fees” charged by the BlackRock TDFs without analyzing whether the funds would be capable of generating significant returns, especially in comparison to “more appropriate alternatives in the TDF marketplace.”

The lawsuit says four of the five largest TDF series aside from the BlackRock suite “represent an ideal group for comparison” as they are the most likely alternatives to have been selected had Capital One chosen to replace the BlackRock TDFs in the plan’s investment lineup. Per the case, the BlackRock TDFs “dramatically, repeatedly underperformed” the average return of the four comparable series during the relevant timeframe. This information was “readily obtainable and computable” by the defendants, who would have replaced the BlackRock TDFs with a suitable alternative if they had “taken their fiduciary duties seriously,” the lawsuit argues.

Compounding the defendants’ decision to retain the BlackRock TDFs as an investment option is the suite’s designation as the plan’s qualified default investment alternative, the suit says. In other words, the case relays, when a plan participant does not select a particular investment option, their assets are automatically invested into the BlackRock TDFs. According to the lawsuit, since most Capital One retirement plan participants are not sophisticated investors, the defendants’ choice of the imprudently selected BlackRock suite as the qualified default investment alternative has magnified the plan’s losses.

“Indeed, by December 31, 2020, approximately 35% of the Plan’s assets were invested in the BlackRock TDFs,” the complaint reads.

The lawsuit looks to represent all participants and beneficiaries of the Capital One Financial Corporation Savings Plan at any time on or after August 1, 2016 and through the date of judgment (or any earlier date the court deems appropriate), including beneficiaries of deceased persons who were plan participants during that timeframe.

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