Podcast: Anderson v. Intel—A Test Case Regarding the Prudence of Adding Alternative Investments to Defined Contribution Plan Menus
In this third episode in a series of Ropes & Gray podcasts addressing emerging issues for fiduciaries of 401(k) and 403(b) plans to consider as part of their litigation risk management strategy, litigation & enforcement partner Amy Roy and benefits consultant Aneisha Worrell discuss some key takeaways from Anderson v. Intel Corp. Investment Policy Committee, the first case to date to address the prudence question under ERISA of including private equity and hedge fund investments on a defined contribution plan menu.
Aneisha Worrell: Hello, and thank you for joining us today for this Ropes & Gray podcast. In today’s episode, we’ll be continuing our series on emerging issues in 401(k) litigation risk assessment and management. I’m Aneisha Worrell, an attorney in our benefits consulting group based in Boston, and joining me today is Amy Roy, a litigation & enforcement partner who is also based in the Boston office. In this episode, we’re going to talk about the latest developments in Anderson v. Intel Corp. Policy Committee, a closely watched case out of the Northern District of California that addresses whether the inclusion of alternative assets, such as private equity and hedge fund investments on a 401(k) plan menu, can satisfy ERISA’s duty of prudence.
Before we begin, we want to provide an important update regarding a topic we have covered in a past episode in this series. On March 10, 2021, the DOL issued a statement saying that until it publishes further guidance, the agency will not enforce either its ESG rule or its proxy voting rule, or pursue enforcement actions against any plan fiduciary based on a failure to comply with both the ESG and proxy voting rules. While this announcement may have led plan sponsors to breathe a sigh of relief, we want to take a moment to caution plan sponsors that this is not a green light to load up their 401(k) and 403(b) plan menus with ESG investment options at this time. Instead, we continue to suggest that fiduciaries continue to adhere to a process of carefully and diligently evaluating and selecting investments based on the expected outcomes for their participants.
On that note, let’s jump into our discussion today. Amy, at the end of January, the court granted the Intel Investment Policy Committee’s motion to dismiss while granting the plaintiff plan participants an opportunity to amend their complaint. Before discussing Judge Koh’s decision, can you provide us with some context for this case?
Amy Roy: Sure, Aneisha. As we have covered in prior podcasts, in recent years there has been a wave of lawsuits targeting 401(k) and 403(b) plan sponsors focused on excessive administrative fees or inappropriate fund selection. Time and again, plaintiffs have alleged that plan sponsors and fiduciaries breached their duties by either (i) failing to invest in less costly vehicles (like separate accounts or collective investment trusts) or (ii) having inadequate safeguards in place for selecting and monitoring fund performance. The Intel case presents an interesting twist on this pattern because the plaintiffs there challenged Intel’s decision to incorporate alternative investments as a component of the target date funds (TDFs) offered under the company’s 401(k) plan and other defined contribution plans. In particular, the plaintiffs alleged that the Intel investment committee breached its duty of prudence under ERISA by adopting a model that excessively allocated assets to hedge funds, private equity and commodities, despite the higher fees incurred by those investments, the risks associated with investing in such assets, and their alleged relative underperformance.
Aneisha Worrell: Thanks for that background, Amy. So in short, the plaintiffs were alleging that these investment options were too expensive, they underperformed and that the plan fiduciaries should have offered different types of investments instead?
Amy Roy: That’s right. The plaintiffs’ core duty-of-prudence claims were based on allegations that these nontraditional investments underperformed and charged significantly higher fees than what the plaintiffs considered to be “peer” or “comparable” funds. However, Judge Koh rejected these allegations, explaining how simply labeling funds as “peer” or “comparable” is not sufficient. Their complaint contained no other factual allegations to support a finding that the funds they identified provided a meaningful benchmark against which to evaluate the performance of the Intel target date funds. Similarly, the court came to the same conclusion in rejecting the plaintiffs’ allegation that other purported comparable funds charged lower fees—there the court said that plaintiffs must do more than find a few less expensive alternative funds with some degree of similarity in order to adequately allege a meaningful benchmark.
Aneisha Worrell: Benchmarking has become a common theme in many of the 401(k) fee lawsuits; however, as you noted, it is a fact-specific analysis. When a plaintiff claims that a prudent fiduciary in like circumstances would have selected a different fund based on the cost or performance of the selected fund, he or she must provide a sound basis for comparison—a meaningful benchmark—as the court noted in Intel.
Amy Roy: That’s correct. Now the plaintiffs were given a chance to address these deficiencies, and they recently filed an amended complaint attempting to do just that. Among the changes made in their amended complaint is a new section that (i) asserts how plan fiduciaries should be comparing competing target date funds on the basis of returns, fees, and asset allocation, and (ii) explains why it was fair to compare the Intel funds against four target date fund families that were within the Morningstar target date fund category in 2011 and all years thereafter. Whether these changes will be persuasive remains to be seen. Further briefing by the parties is scheduled to continue through the rest of the spring and early summer.
It will be interesting to see how this plays out. In the meantime, we have on the books a decision that supports the principle that a plaintiff should not be able to have a court automatically rely on the plaintiff’s proffered benchmarks when reviewing a prudence claim, essentially raising the bar for plaintiffs in these types of cases. Now let me ask you, Aneisha, do you think this decision will make a 401(k) or a 403(b) plan sponsor more inclined to add alternative investments to a plan’s menu options going forward?
Aneisha Worrell: It’s quite possible, Amy; however, I would caution plan sponsors and fiduciaries that before they go about adding any new investment option, whether it is a traditional fund or a new kind of non-traditional investment—such as private equity, hedge funds, or even ESG-focused funds—to a DC plan’s lineup, they ought to make sure they are following a comprehensive and diligent process to select these investments.
Amy Roy: To build on that, plan sponsors should also keep in mind that while there’s no duty under ERISA to choose the cheapest investment option available, ERISA is a process-focused regime and fiduciaries must be explicit in explaining and documenting why a specific type of investment was selected or appropriate for the plan and its participants. The more detailed the rationale for selecting the class of investments, the harder it will be for a plaintiff’s claim that the plan should have selected investment options with lower fees to proceed on the merits.
Furthermore, plan fiduciaries do not have to adhere to industry practice in making these types of decisions. In Intel, Judge Koh rejected the plaintiffs’ argument that the plan sponsor was imprudent because they “drastically departed from prevailing standards of professional asset managers…” making clear that although ERISA requires fiduciaries to act prudently, it does not require fiduciaries to mimic the industry standard when making investment decisions. The court held that while market practice may inform a fiduciary’s decision, it is not a restraint on the fiduciary to act in the same manner.
Aneisha Worrell: Thanks for that additional color, Amy—that’s very helpful and informative. And thank you for joining me today for this conversation. For more information regarding the topics we’ve discussed or other aspects of 401(k) litigation risk assessment and management, as well as links to our recent articles, please visit our website www.ropesgray.com. If we can help you to navigate this complex and rapidly developing area of the law, please do not hesitate to contact us. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening, and stay well.