Christopher M. Sulyma filed a lawsuit on behalf of two proposed classes of
participants in the Intel 401(k) Savings Plan and the Intel Retirement
Contribution Plan, claiming that the defendants breached their fiduciary duties
by investing a significant portion of the plans’ assets in risky and high-cost
hedge fund and private equity investments through custom-built target-date
The lawsuit says the Intel custom-built funds have
underperformed peer funds by approximately 400 basis points annually. The
lawsuit claims automatic enrollment and a reenrollment of existing participants
resulted in more than two-thirds of participants being allocated to
custom-built investments. It goes into great detail about why the plaintiffs
believe hedge funds and private equity funds are inappropriate investments for
Employee Retirement Income Security Act (ERISA) retirement plans.
PLANSPONSOR reached out to Marcia Wagner, principle with
Wagner Law Group in Boston, for comments about the case.
you see the Intel case as opening the door to other cases about the
construction of custom target-date funds or TDFs, just as the number of cases
about excessive fees in retirement plans grew
Wagner: While the
Intel case is an offshoot of the excess fee and stock drop cases and utilizes
many of the same legal theories, I doubt the new complaint will open up new opportunities
for the plaintiffs’ bar, since its underlying facts are fairly unique,
specifically that an individual account plan offered alternative
My sense is that it is still mainly defined benefit pension
plans that are interested in hedge funds and private equity, which are the
focus of the Intel case. This is not to deny that interest in these alternative
investments on the part of defined contribution plans has grown in recent
years. In fact, despite the added risks and work they entail, many see
alternative investments as the perfect antidote to the anemic returns forecast
for the broad-based equity and bond markets. A 2011 report by the ERISA
Advisory Council to the Secretary of Labor attests to this fact.
you think the case has a chance of surviving a motion to dismiss?
Wagner: While it
is never safe to make a prediction in this context, the complaint itself has a
number of conceptual and technical problems that make me wonder whether it can
survive a motion to dismiss.
First is the issue of establishing proper benchmarks or the
issue of how damages were measured. My reading of the complaint is that
accounts in the two Intel plans did not incur losses in the conventional sense.
Rather, the Intel plans, on average, did not make as much as money during the
class period as a certain benchmark selected by plaintiff’s attorney Cohen
Milstein Sellers & Toll. I do not want to suggest that this result is not
actionable if it was caused by a fiduciary breach. However, it is an unusual
circumstance and could influence a court’s view as to whether a fiduciary
breach occurred or has been properly alleged in the complaint.
The benchmark the complaint uses to measure the difference
between actual returns under the Intel plans and what the complaint contends
these returns should have been is a series of indexed Fidelity funds. If only
the Intel Investment Committee had had the sense to invest in these Fidelity
funds, the complaint argues, the plan’s rate of return would have been 400
additional basis points annually. Of course, this translates to an additional
4% return, a significant figure to be sure, but perhaps not enough to convince
me that there has been a fiduciary breach.
Another problematic benchmarking-type of issue is how the
complaint attempts to establish that the Intel plan’s level of investment in
hedge funds was too high. The complaint regularly refers to “prevailing asset
allocation models,” “prevailing standards” and “peer TDF’s.” What this means in
the end (as reflected in paragraph 118
and Exhibit I of the complaint) is that eight commercially available target-date
funds either did not utilize alternative investments or failed to break them
out in their reports on investment allocation.
The correct fiduciary decision-making process for selecting
an investment under the Employee Retirement Income Security Act, or ERISA, is
to investigate the particular investment in question so as to fully understand
it and, based on the facts gathered, make a rationale decision as to whether it
fits the role prescribed for it in the plan’s investment portfolio. This
process should include an evaluation of whether the specific investment’s
potential for gain is commensurate with its risk of loss. The actions of peers
and competitors represent only one strand in this reasoning process.
do you see a problem in the lawsuit’s argument that hedge funds and private
equity investments are inappropriate for defined contribution retirement plans?
Wagner: The use
of a passively invested index funds to measure damages is a signal of what the
Intel case is really all about. At bottom, the complaint is an attack on the
design of the Intel plan’s target-date funds, for which the underlying
investments are actively managed funds subject to higher fees in the hopes of
obtaining better returns. This is expressed most directly in paragraph 156 of
the complaint which argues that a “two percent annual flat fee on assets under
management [as charged by an actively managed hedge fund seeking superior
returns] … is not justified in the defined contribution plan context.”
Addressing the issue of risk in a similar vein, paragraph
139 of the complaint asserts a corollary to its position on fees: “Managing a
retirement plan therefore must focus always on the most vulnerable participant”
by which it seems to mean a non-highly compensated employee working in the
shipping department. As a general rule, in all investment matters the greater
the potential for gain, the higher the level of risk. The Intel complaint seeks
to establish the proposition that ERISA prohibits target-date funds in a
retirement plan from investing in anything with an unusual level of risk or
that is actively managed and has high fees.
In other words, ERISA retirement plans need to be dumbed down.
The goals asserted by the Intel complaint are debatable as a
matter of policy. However, I do not see that
they are reflected in DOL regulations or other guidance relating to target-date
funds, much less in ERISA’s statutory provisions.
the Intel custom-built funds underperformed peer investments, according to the
lawsuit; does that not add validity to the complaint?
Wagner: Under the
pleadings standard set forth by the Supreme Court in Ashcroft v. Iqbal, a complaint must contain sufficient factual
matter, which if accepted as true, states a “claim to relief that is plausible
on its face.” In my opinion, the Intel complaint does not do a very good job in
linking the asserted underperformance of the plan’s target date portfolios (TDPs)
to specific hedge fund and private equity positions taken by the plan. There is
no need to prove anything at this stage, but it is necessary to do more than
cite press reports and various studies claiming that hedge funds, as a group,
are risky and have underperformed.
Paragraph 181 of the complaint does note that the Intel
plans’ hedge fund portfolio lost 17% during the 2008 financial crisis. I would
not consider that a major indictment, since many funds lost money in 2008, and
reasonable investors could well have anticipated a rebound. The complaint
contrasts the 2008 loss with a 5.2% gain in a Barclay’s bond index. This
comparison is an apples and oranges type of comparison, and it is hard to
understand the point being made. After 2008, the supporting factual evidence
cited by the complaint rests largely on generalized predictions regarding hedge
funds that appeared in magazine articles and certain studies. Since these
reports have no connection to the Intel plan’s actual investments, I would say
that the complaint runs the risk of failing to meet the Supreme Court’s
complaint accuses the plans’ administrative committee of failing to adequately
disclose to participants the risks, fees and expenses associated with
investment in hedge funds and private equity. Participants were given virtually
no information about these investments other than that there were some hedge
fund and private equity investments made by the plan. Virtually nothing about
the strategy, the risks, the fees or anything about underlying investments was
disclosed in anything that defendants provided to or made available to
participants. Does this allegation have a chance of moving forward?
Wagner: As is
common in excess fee and stock drop cases, the Intel complaint asserts a cause
of action for failing to disclose certain particulars (e.g., investment
performance over specified periods) regarding three of the plan’s nine
“Investment Funds”, specifically, the “Hedge Fund,” “Private Equity Fund” and
“Commodities Fund.” There appears to have been an assumption that this
disclosure is required, because these funds constitute “Designated Investment
Alternatives,” a term defined by the applicable disclosure regulations as “an
investment alternative designated by the plan into which participants and
beneficiaries may direct the investment of assets held in, or contributed to,
their individual accounts.”
I am not sure how the Intel plan works, and whether or not
participants can choose to invest their account assets directly into one or
more of these investment funds or whether a participant must choose one or more
of the so-called TDPs. Each TDP allocates a different percentage of its assets
across the Intel plan’s various Investment Funds with each TDP becoming more
conservative as it nears its maturity date.
If the only way to invest in the Intel Hedge Fund or Private Equity Fund
is through one of the TDPs, then it would seem that the TDPs, not the Investment
Funds, are the plan’s Designated Investment Alternatives. (This analysis is consistent with Question 28
of DOL Field Advisory Opinion 2012-012R.) The consequence of this would be that
the disclosure obligation would relate to each TDP, not to a TDP’s underlying
Another possible misfire relates to the fact that the
earliest possible effective date for the then new disclosure requirement was
August 2012, just as the plaintiff’s two-year tenure with Intel was ending. If
the plaintiff had cashed out his plan account, he would not have been entitled
to any disclosure under the new regulations. Even if disclosure were required
to the plaintiff as a continuing plan beneficiary, it would only be for periods
after the effective date of the new rule. Thus, for at least half of the class
period, there was no requirement to make the disclosures demanded by the
the lawsuit does survive a motion to dismiss, do you think it will get class
Milstein has obviously attempted to construct the broadest possible group of
Intel employees as participants in the plaintiff class in order to ensure a
large damages award. In this, it may have overreached, as is often typical in
this type of case. As already noted, the sole plaintiff who seeks to represent
the class had a relatively brief tenure with Intel. This makes it more likely
that the circumstances of his plan dealings differ from those of other plan
participants so that he has less in common with them and may even have
interests that are adverse to them.
The Intel Plan appears to have offered at least 12 TDPs with
maturity dates set five years apart, each of which was allocated differently
among the plan’s nine investment funds. As previously noted, the allocations of
target-date funds, such as the TDPs, grow more conservative as the funds
approach maturity. Thus, participants in each TDP would have experienced
different rates of return or loss in a given period. Even if the plaintiff is
successful in asserting that his TDP experienced a 400 basis point loss, he
could be sacrificing the interest of participants in another TDP who
experienced a more favorable result. This type of analysis has served as the
basis for denying class certification in other cases, because it demonstrates
the lack of commonality among putative class members.
other comments about the case?
Wagner: The Intel
case provides a lot to think about, and the issues are not limited to those we’ve
discussed. This is a preliminary analysis of the complaint.