ERISA Lawsuit Reaches the Supreme Court

The legal question that they ask the Court to answer is whether the plan participants had to show that those investment choices performed worse than comparable investments. The fundamental problem with Intel’s position, they argue, is that they cannot determine whether a comparable fund exists without discovery, a later step in litigation. Participants see this as a pleading trap. A similar petition for review in Parker-Hannifin Corp. v. Johnson is also pending before the Supreme Court.

Risky investments – who benefits?

Anderson, a long-time Intel employee, claimed that the Intel fiduciaries failed to meet the ERISA standards of prudence. Specifically, he argued that the company’s Target Date Funds and Global Diversified Funds were imprudently managed because they included unusually large allocations to “non-traditional investments” like hedge funds and private equity. Anderson claimed this strategy exposed participants to excessive risk and led to significant underperformance compared to readily available, traditional investment options.

He also alleged a breach of the duty of loyalty, claiming that the plan fiduciaries favored investments in companies already associated with Intel’s venture capital arm, Intel Capital, thereby prioritizing corporate interests over the retirement savings of employees.

Prudence and loyalty

The federal Employee Retirement Income Security Act (aka ERISA) governs most private-sector employee benefit plans. Congress passed ERISA in the wake of a disastrous Studebaker bankruptcy that left many aging auto workers, who thought they had a retirement pension to live on, with nothing more than a “Thanks and good luck, fella.”

ERISA’s core purpose is to protect the financial future of retirement plan participants. In pursuit of that principle, ERISA sets forth two rules for the individuals or committees responsible for managing the plan participants’ retirement savings. Briefly, these are:

• a fiduciary must act “with the care, skill, prudence, and diligence” that a prudent person would use in a similar enterprise; and
• those actions must be undertaken “solely in the interest” of the plan participants and beneficiaries.

However, these simple and somewhat absolutist statements leave lots of room for interpretation. To further complicate the matter, fiduciaries are not legally responsible for the outcomes of their investment decisions, just the purity of their motives. As a result, ERISA fiduciary breach lawsuits generally focus on the process by which decisions are made.

The meaningful benchmark rule

The specific problem posed to the Supreme Court in Andersen is twofold. First, must a plaintiff set out a “meaningful benchmark,” a point of comparison against which the fiduciary’s actions can be evaluated? Second, if the plaintiffs must provide a benchmark, when do they have to offer this? Can it happen after the parties have exchanged information in discovery, or must it happen earlier, when plaintiffs may not have access to internal documents detailing the decision-making process?

Both the Northern District of California and the Ninth Circuit Court of Appeals dismissed the lawsuit’s claims at a very early stage. The Intel funds were highly customized and proprietary, designed by Intel itself with unique risk-mitigation strategies. The courts found that Anderson’s comparisons to mainstream, equity-heavy retail funds, like those tracking the S&P 500, were not sufficiently “meaningful” to support claims of imprudence. Essentially, the Ninth Circuit concluded that Anderson failed to find an identical twin for Intel’s bespoke, non-traditional funds.

A pleading trap

The petition for certiorari argues that the Ninth Circuit’s strict application of the “meaningful benchmark” requirement imposes a paralyzing pleading standard that fundamentally conflicts with ERISA’s core purpose, which is to protect the financial future of retirement savers.

Why should 401k plan participants care?

In 1974, when ERISA was enacted, the universe of investment options that fiduciaries might consider was more limited than it is today. Hedge funds, private equity and other non-traditional investment vehicles were unheard of. The challenge on the horizon is, of course, cryptocurrency.

The current administration appears to be poised to revise the regulatory guidance for 401k plan fiduciaries  in ways that would allow them to consider “alternative assets” for investment. Crypto fan or not, this seems a departure from the very conservative guidance initially offered to protect employee retirement income.