A case involving custom target-date funds that made its way all the way to the U.S. Supreme Court (and back) has concluded—for the moment—in favor of the plan fiduciaries.
The original lawsuit, filed in November 2015 in the U.S. District Court for the Northern District of California by former Intel employee Christopher Sulyma (subsequently joined with a suit brought by fellow Intel employee Winston Anderson), had charged that Intel’s investment committee boosted the $6.66 billion profit-sharing plan’s allocation for hedge funds in the firm’s target-date portfolios from $50 million to $680 million, while at the same time the allocation for hedge funds in the diversified global fund rose from $582 million to $1.665 billion, and to private equity investments from $83 million to $810 million, between 2009 and 2014.
The suit claimed that participants were not made fully aware of the risks, fees and expenses associated with the hedge fund and private equity investments, or to the underperformance of the company’s target-date and global diversified funds compared to their peers, and that as a result participants “suffered hundreds of millions of dollars in losses during the six years preceding the filing of this Complaint as compared to what they would have earned if invested in asset allocation models consistent with prevailing standards for investment experts and prudent fiduciaries.”
Bench, ‘Pressed’
After recounting the history[1] of the suit and how it came to her attention, Judge Lucy H. Koh of the U.S. District Court for the Northern District of California summed up (Anderson v. Intel Corp. Inv. Pol’y Comm., N.D. Cal., No. 5:19-cv-04618, 1/21/21) the six causes of action alleged (see below[2]).
Regarding two of them, after a recitation of the point/counterpoint arguments of the parties, Judge Koh concluded that, “…although Plaintiffs allege comparisons of the Intel Funds’ performance to ‘peer’ and ‘comparable’ funds, Plaintiffs have failed to provide sufficient allegations to support their claim that these other funds are adequate benchmarks against which to compare the Intel Funds.”
As for the excessive fee aspect—well, Judge Koh noted that, “…here too Plaintiffs have failed to substantiate their allegation that the funds Plaintiffs offer in comparison to the Intel Funds provide a meaningful benchmark,” adding that they “merely refer to the funds as ‘comparable’ or ‘similar.’”
And thus, she explained, “without factual allegations to support Plaintiffs’ claim that the complaint compares fees incurred by the Intel Funds with a meaningful benchmark, the Court cannot discern whether Plaintiffs are comparing funds that have different ‘aims, different risks, and different potential rewards that cater to different investors.’” Moreover, “absent such allegations, Plaintiffs’ allegations regarding excessive fees are insufficient to state a claim for breach of the duty of prudence, even in conjunction with further allegations of poor performance and self-dealing by the Investment Committee,” she wrote.
As for the allegation that “the Investment Committee’s imprudence is demonstrated by the fact that the Intel Funds’ allocation models ‘drastically departed from prevailing standards of professional asset managers,’” Judge Koh took issue not only with some of the comparisons put forth by the plaintiffs (“these comparisons fail to state a claim for breach of the duty of prudence”), but that, “as Defendants rightfully point out, and Plaintiffs do not contest, ERISA requires that fiduciaries act prudently, but it does not require that fiduciaries mimic the industry standard when making investments.”
“Plaintiffs do not cite a single case to support the proposition that the deviation they highlight states a claim for breach of the duty of prudence,” Judge Koh explained, going on to note that, “The Court cannot find any such case. The Court therefore finds that Plaintiffs’ allegations regarding the Intel Funds’ deviation from industry allocation standards do not state a claim on their own for breach of the duty of prudence by the Investment Committee.”
Risk (Re)Warn?
As for the risks in those investments, the plaintiffs alleged that “a prudent fiduciary in 2011” would have properly investigated the risks in hedge funds and private equity funds, but, Judge Koh explained, “many of the sources that Plaintiffs cite to support these claims were not available in 2011.”
Ultimately, Judge Koh concluded that, “…although Plaintiffs have plausibly alleged that there was some evidence available in 2011 that hedge funds and private equity funds carried risks and that a prudent fiduciary could have found that evidence, that small body of evidence is insufficient on its own to support a claim for breach of the duty of prudence by the Investment Committee.”
Regarding the allegations of conflicts of interest, Judge Koh noted that while the plaintiffs had alleged that by investing in private equity funds “provided by investment companies that Intel Capital partnered with, the Investment Committee ... helped Intel Capital develop and maintain a profitable network of investment companies that could provide Intel Capital and Intel with access to new technology startups” that “the mere fact that Intel Capital invested in a tiny percentage of the same companies that also received investments from private equity funds that the Intel Funds invested in is not sufficient to plausibly allege a real conflict of interest, rather than the mere potential for a conflict of interest.”
As for the allegations regarding conflicts of interest, Judge Koh agreed with Plaintiffs that “plausible allegations that the Intel Funds suffered from higher-than-average fees and poor performance, combined with plausible allegations of self-dealing by the Investment Committee, may be sufficient to state a claim for breach of the duty of prudence”—but concluded that the plaintiffs “…failed to plausibly allege facts sufficient to state a claim under that standard.” For those looking to improve on that result, she noted that “plaintiffs must provide a meaningful benchmark against which to compare the Intel Funds.”
Disclose ‘Sure’
There is an irony in the allegations of failure to disclose adequate information, as the definition of “actual knowledge”—specifically when the plaintiff became aware, and thus when the statute of limitations began—was the issue when this case was presented to the U.S. Supreme Court. Judge Koh explained that while the plaintiffs here satisfied elements of establishing an “injury-in-fact,” those allegations are “insufficient to plausibly allege an injury-in-fact that is traceable to Defendants’ conduct because Plaintiffs do not allege that Plaintiffs read any of the allegedly defective documents or relied upon those documents.” And thus, she wrote, “absent allegations that Plaintiffs read or relied upon the allegedly defective documents, Plaintiffs have failed to allege an injury-in-fact that is traceable to Defendants’ conduct, and therefore Plaintiffs lack Article III standing to bring Counts III and V.”
As for the allegations regarding the failure to monitor the committee’s activities, Judge Koh found that these claims “…fail because Plaintiffs have failed to state an underlying ERISA violation. As such, Plaintiffs have failed to state a claim for failure to monitor and co-fiduciary liability.”
That said, “because granting Plaintiffs an opportunity to amend the complaint would not be futile, cause undue delay, or unduly prejudice Defendants, and Plaintiffs have not acted in bad faith,” Judge Koh left the door open for them to amend their complaint—so long as they do so within 30 days. If they fail to do so (and they are precluded from adding new claims or parties without a stipulation or leave of the Court), that would result in a dismissal of these currently deficient claims—with prejudice.
What This Means
While the “actual knowledge” standard set out by the Supreme Court in this case is surely problematic for those who might hope that making the information available would be sufficient to establish awareness, the ruling on the scenario presented reminds us that allegations must be specific, that the injuries suffered need to have some relationship to the breaches alleged, and that you can’t have a breach of oversight if there is no breach to be overlooked.
Footnotes
[1] The original suit was dismissed in 2017 based on statute of limitation grounds, based on when Sulyma was determined to have known about the target-date fund allocation to hedge funds/private equity at issue in the case. Subsequently, the Ninth Circuit reversed that decision on appeal, and ultimately the U.S. Supreme Court backed that decision, ruling that “actual knowledge” meant just that (regardless of when they might have had an opportunity to know something).
[2] The six causes of action are:
- breaches of duty under ERISA §404(a) by the Investment Committee in selecting and monitoring the investments in the Intel Plans (more precisely, by adopting an asset allocation model that “excessively allocated assets to Non-Traditional Investments,” despite their higher fees and risks);
- breaches of duty under ERISA §404(a) by the Investment Committee in managing the assets of the Intel Plans, including failure to monitor and evaluate the asset allocation in the Intel Funds;
- breaches of duty under ERISA §§404(a)(1)(A) and 404(a)(1)(B) by the Administrative Committee for failing to provide material and accurate disclosures to plan participants;
- breaches of duty under ERISA § 404(a) by the Finance Committee and Chief Financial Officers for failure to monitor the Investment Committee;
- violation of ERISA § 102(a) by the Administrative Committee for issuing Summary Plan Descriptions that failed to properly disclose and explain risks associated with the asset allocations in the Intel Funds;
- co-fiduciary liability under ERISA § 405 against all Defendants.
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