This, Intel argues, must happen at the beginning of a lawsuit when defendants typically seek to have a case dismissed because plaintiffs have failed to plausibly argue that any law has been broken. It is important to note that this stage occurs before the plaintiffs have had the opportunity to discover underlying decision-making processes.
Risky compared to what? It seems like an elementary question. But having to offer a reasonable comparison at the pleading stage of a lawsuit may be an insurmountable burden for plan participants who challenge unusual and highly customized investment choices.
Anderson deals with exotic investment choices that do not have much history. Requiring plan participants to offer evidence of a safer choice in their initial complaint could knock most retirement savers out of court before they get a chance to argue their case.
That’s why Anderson is important.
High fees, low returns and a whiff of self-dealing
Participants in the Intel 401(k) Savings Plan and the Intel Retirement Contribution Plan alleged that fiduciaries breached their legal duty under ERISA by “investing billions of dollars in retirement savings in unproven and unprecedented investment vehicles. These investment strategies featured high-priced, low-performing illiquid and opaque hedge funds, private equity and other alternative investments. The plaintiffs claim that this led to lower returns and higher fees – allegedly as much as 940 percent higher – compared to more traditional plan investments.
The ERISA lawsuit also implies that Intel Corp. shifted participants’ retirement savings into investments that were offered by private equity or venture capital investment firms in which Intel Capital invested. Intel Capital is the investment arm of Intel Corp. Intel Capital specializes in edgier investments – risky emerging companies and tech startups.
Risky compared to what?
The Northern District of California dismissed the plaintiffs’ claims, and the Ninth Circuit affirmed. It held that when a plaintiff relies on underperformance or excessive fees to infer imprudence, the complaint must identify a “meaningful benchmark” — that is, a comparator fund with sufficiently similar aims, risks, and objectives. The Ninth Circuit concluded that the comparisons offered by the plaintiffs – to indices, Morningstar peer groups, and other target date funds – were not sufficiently like the challenged investment options for the comparison to be meaningful.
ERISA duties of prudence and loyalty
Section 404 of ERISA sets out the basic requirement that fiduciaries act “with care, skill, diligence and prudence” and with a sole eye to safeguarding plan participant’s retirement funds for them, their beneficiaries, and to pay reasonable plan expenses. But in 1974, most retirement plans were defined benefit plans, where the plan sponsor bore most of the risk, and investments were largely limited to stocks and bonds.
The regulatory guidance as to what “prudence” and “loyalty” mean has evolved considerably especially with the changing financial landscape. Intel, for example, argues that diversification into private equity and hedge funds was a prudent strategy designed to reduce risk during stock market downturns – a lesson hard learned during the 2008 financial crisis.
READ MORE ERISA VIOLATION LEGAL NEWS
None of the evolving regulatory guidance addresses the customized investment strategies embraced by the Intel plans’ fiduciaries. Ultimately, if the Supreme Court reverses the Ninth Circuit’s dismissal of Anderson, plaintiffs will have to show that these investment allocations did not satisfy the general principles laid out in ERISA. But for the moment, the issue before the high court is whether ERISA requires breach of fiduciary duty plaintiffs to offer a benchmark for comparison.
Why Anderson matters
If the Supreme Court rejects the “meaningful benchmark” requirement, plan participants may find it easier to challenge fiduciary decisions to invest the participants’ retirement savings in exotic, customized and relatively untested ways.
On the other hand, if the Supreme Court adopts the “meaningful benchmark” requirement articulated by the Ninth Circuit, plan sponsors may conclude that investment strategies that incorporate alternative investments meet the fiduciary standards of ERISA. It could harm plan participants by opening the door to increasingly risky investment management decisions.
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