Intel lawsuit raises new concerns for plan sponsors
Commentary: A former Intel Corporation employee is suing the company for allegedly breaching their fiduciary responsibilities by investing employees’ retirement money in “risky and high-cost” hedge funds and private equity funds.
“The Plans and [its] 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,” according to the lawsuit filing.
The suit further claims that the plans’ administrative committee failed to adequately disclose to participants the risks, fees and expenses associated with investment in hedge funds and private equity. Moreover, according to the suit, virtually nothing about the strategy, the risks, the fees or anything about underlying investments was disclosed to participants. With limited transparency of the underlying investments, Intel made it hard for employees to know what they really owned, according to the claim.
The claim states Intel dramatically altered the investment capital model by increasing its target-date portfolio investment in hedge funds to $680 million from $50 million, while hiking the diversified fund portfolio’s exposure to hedge funds from $582 million to $1.6555 billion. It increased the investment in private equity funds to $810 million from $83 million, from 2009-2014.
“The investment committee's allocation decisions not only deviated greatly from prevailing asset allocation models adopted by investment professionals and plan fiduciaries, but also exposed the plans and their participants to unreasonably costly and risky investments in hedge and private equity funds,” states the lawsuit.
In regards to Intel’s $8.19 billion 401(k) plan, the target-date series is the largest component. As of April 2015, the target-date series included $3.63 billion in assets. By the same date, the global diversified fund had $5.82 billion in assets.
Also see: “Swarm of litigation rocks 401(k) space.”
Earlier in the year, Intel hired AllianceBernstein (AB) as the investment manager for these funds within 401(k), retirement contribution and SERPLUS accounts. As the investment manager, AB “designs, monitors and adjusts each fund’s asset mix.”
The case has a number of technical and conceptual problems that might make the motion difficult. Because Intel did not benchmark losses in a conventional sense and did not make as much money during a class period, it is an unusual circumstance that could influence a court’s view to whether a fiduciary breach occurred or has been properly alleged.
Another problematic benchmarking issue arose regarding the high investment in hedge funds. This means that realistically, the available target-date funds either did not apply alternative investments or failed to break them out in their reports and allocations.
The goals in the Intel suit are debatable as a matter of policy; however, they are not reflected in the Department of Labor’s regulations or other guidance related to target-date funds.
This lawsuit, like many similar cases before it, proves that plan sponsors should carefully reexamine their current plan offerings. The suit is a challenge to 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.
The case provides a lot to think about. The results have sparked what could be a vicious precedent-setting ERISA-invoking class action, but the court has yet to rule on that. For now, we will wait to see if this lawsuit will ignite other cases about the construction of custom target-date funds, just as we saw an influx of cases about excessive fees in retirement plans.
Brian Menickella is a co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm offering companies and individuals advice on insurance, investing and employee benefits.