The U.S. 9th Circuit Court of Appeals ruled in favor of fiduciaries of the Intel defined contribution (DC) plans, the latest development in a long-running legal saga that involved multiple lawsuits. The key allegation stated that the inclusion of alternative investments in the DC plans was a breach of the fiduciaries’ duties under the Employee Retirement Income Security Act (ERISA).

Background on Alts in DC Plans Suit

A complaint filed by a former plan participant in 2019 in the U.S. District Court for the Northern District of California alleged that Intel DC plan fiduciaries had breached their ERISA duties of prudence and loyalty by including private equity and hedge funds in custom target date funds offered in the Intel DC plans.

• Alleged breach of fiduciary duty of prudence: The plaintiff alleged that the investments were excessively risky, costly, and illiquid, and that the funds with exposure to these investments had underperformed other investments. However, the district court found, and the appeals court affirmed the dismissal of the claims, holding that the plaintiffs’ had not pled a viable breach of fiduciary duty claim because plaintiffs had not pled either (i) specific actions inconsistent with the fiduciary obligations or (ii) an appropriate benchmark from which it could be inferred that the investment selected was imprudent.
• Alleged breach of fiduciary duty of loyalty: The plaintiff also alleged that plan fiduciaries had steered retirement funds toward companies in which Intel Capital, Intel’s venture capital arm, had invested, which the plaintiff alleged represented a conflict of interest. In the affirmation, the court found the plaintiff did not plausibly allege a “real conflict of interest,” but merely the potential for a conflict of interest.

Notably, the appeals court found that for a complaint to move forward the allegations must affirmatively address fiduciary prudence specific to the selection of the investment and its subsequent monitoring and cannot solely rely on poor performance to allege fiduciary imprudence. In lieu of specific allegations as to the actions of a fiduciary, which may not be visible to the beneficiaries, the Ninth Circuit joined other circuits in recognizing a narrow exception whereby fiduciary imprudence can be inferred by alleging that an appropriate benchmark investment demonstrates that investing in the similar fund was imprudent.

In the affirmation, the appeals court also referenced an information letter published by the U.S. Department of Labor (DOL) in 2020 during the first Trump administration. The letter stated that a plan fiduciary would not “violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.” The letter also mentioned factors related to private equity—such as fees, access, liquidity, valuation, and transparency—that plan fiduciaries should have the necessary capacity and ability to evaluate to ensure a prudent selection and monitoring process.

Bottom Line

For plan fiduciaries, the Intel case demonstrates that the inclusion of alternative investments within a DC multi-asset framework is not prohibited and highlights the importance of establishing and following a sound fiduciary framework for investment selection and monitoring.

Disclaimer: This is a summary and does not purport to be a complete description of the case. This summary is provided for informational purposes only and should not be construed as legal advice. Any decision made on the basis of this document is the sole responsibility of the recipient.