Custom Portfolio Fees, Allocations Questioned in ERISA Complaint

Retirement plan fiduciaries at Intel are accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company's custom target-date funds.

As it awaits the results of a Supreme Court appeal on another case scrutinizing its investment decisions, Intel Corporation now faces an additional lawsuit questioning the fees and performance of custom target-date funds (TDFs) offered to its defined contribution (DC) retirement plan participants.

The lawsuit, filed in the U.S. District Court for the Northern District of California, suggests a number of Intel defendants breached their fiduciary duties by investing billions of dollars of employees’ retirement savings in “unproven and unprecedented investment allocation strategies featuring high-priced, low-performing illiquid and opaque hedge funds.”

Case documents show the lead plaintiff is a participant in two Intel retirement plans, bringing this action on behalf of a class of similarly situated participants. According to the plaintiff, Intel plan fiduciaries “deviated greatly from prevailing professional investment standards for such retirement strategies in several critical ways.” Chief among them, according to the lawsuit, is the investing of billions of dollars in hedge funds, private equity and commodities.

“And then, as investment returns repeatedly lagged peers and benchmarks, [plan fiduciaries] did nothing while billions of dollars in retirement savings were lost,” the complaint states. “[Defendants] deviated from the standard of care of similarly situated plan fiduciaries who select target-date funds for their plans that include little or no exposure to these strategies.”

The complaint further states that Intel defendants failed to properly monitor the performance and fees of either the custom TDFs or of a custom multi-asset portfolio with a fixed allocation model that is also available to participants. The complaint says defendants failed to properly investigate the availability of lower-cost investment alternatives with similar or superior performance and failed to properly monitor and evaluate the “unconventional, high-risk allocation models adopted for these custom investment options.”

Additionally, the compliant states, Intel defendants failed to provide adequate disclosures associated with the custom investment options’ “heavy allocation” to hedge funds and private equity, and either misinformed or failed to inform participants about the allocation mix of their account balances and the allocation strategy of the custom options.

“As a result of these imprudent decisions and inadequate processes, defendants caused the plans and many participants in the plans to suffer substantial losses in retirement savings,” the complaint alleges.

Stretching over 100 pages, the complaint includes substantial detail about the process Intel allegedly used to create and manage the custom funds. Notably, until January 1, 2018, the Intel TDFs and multi-asset funds were not technically funds—as there was no distinct legal entity such as a mutual fund or collective trust that held the investments. Rather, they were allocation models that directed participant savings into various pooled investment funds. Each of these pooled investment funds was structured as a collective trust. Effective December 31, 2017, the Intel models were converted to standalone collective investment trusts.

According to plaintiffs, throughout the history of these investment strategies being offered, participants have consistently been charged fees significantly higher than both actively managed and passively managed target-date series offered by professional asset managers. At the same time, plaintiffs allege, the custom investments have demonstrated substantially worse performance, both in absolute terms and on a risk-adjusted basis.

This is in fact at least the second lawsuit Intel faces questioning its decisions in offering custom investments. Back in November 2015, plaintiffs first filed what has now proved to be a long-running compliant that similarly alleges fiduciary failures by various Intel defendants. That case, Sulyma v. Intel Corporation, was initially decided in favor of Intel on statute of limitations grounds. However, the 9th U.S. Circuit Court of Appeals overturned the ruling in December 2018, finding that disputes of material fact exist as to the timing of the plaintiff’s actual knowledge of the alleged fiduciary breach, precluding summary judgment for untimely filing. This appellate ruling in turn has been accepted for review in the next term of the U.S. Supreme Court.

The Sulyma case is potentially quite significant in that the question of what creates “actual knowledge” plays directly into arguments of timeliness under ERISA. In basic terms, this is because the timing of when “actual knowledge” of a potential fiduciary breach is established is used to define when one of several potential statues of limitations will start to run for a given fiduciary action or decision.

The full text of the new complaint is available here.

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