The latest excessive fee litigation claims that, “after driving the retirement savings of thousands of Intel employees into the ditch, the Investment Committee turned the keys of the wreck over to someone else.”
Plaintiff (and former Intel employee) Winston Anderson has alleged (Anderson v. Intel Corporation Investment Policy Committee et al., case number 5:19-cv-04618, in the U.S. District Court for the Northern District of California) that the fiduciaries of the Intel 401(k) Savings Plan and the Intel Retirement Contribution Plan breached their fiduciary duties by “investing billions of dollars in retirement savings in unproven and unprecedented investment allocation strategies featuring high-priced, low-performing illiquid and opaque hedge funds.”
The approach that Intel took with two target-date funds – one that, as of Dec. 31, 2017, had over 71,000 participants with account balances and approximately $11.82 billion in total assets; and the other at that point in time had approximately 40,000 participants with account balances and approximately $6.59 billion in total assets – is already at issue in another lawsuit involving Intel (and now on its way to a review by the U.S. Supreme Court (more on that in a minute).
This plaintiff claims that “the Investment Committee designed and implemented retirement investment strategies, a suite of target date portfolios (“Intel TDFs”) with a dynamic allocation model (meaning allocations to asset classes changed over time) and a multi-asset fund with a fixed allocation model (“Intel GDFs”) that “deviated greatly from prevailing professional investment standards for such retirement strategies in several critical ways – chief among them was investing billions in hedge funds, private equity and commodities – and then as investment returns repeatedly lagged peers and benchmarks did nothing while billions of dollars in retirement savings were lost.”
This, plaintiff Anderson argues, was evidence that the plan’s investment committee “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,” and that the Investment Committee “(a) failed to properly monitor the performance and fees of the Intel TDFs and Intel GDF in the Plans and to properly investigate the availability of lower-cost investment alternatives with similar or superior performance, and (b) failed to properly monitor and evaluate the unconventional, high-risk allocation models adopted for these custom investment options, which excessively allocated assets of the Plans to speculative investments.”
The suit also alleges that the plan’s Administrative Committee “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 target-date options.” And, if that weren’t enough, the plaintiff also charges that “the Finance Committee and the Chief Financial Officers failed to monitor the Investment and Administrative Committees,” all of which means that, “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 plan fiduciaries, according to the suit, “did not disclose (a) that hedge funds and private equity funds often use leverage, which can magnify losses; (b) that these investments lack liquidity; and (c) that they lack transparency; and (d) that investing in them carries significant valuation risk,” much less that, “as a result of the Intel Funds’ significant allocations to hedge funds and/or private equity, the Intel Funds posed those investment and valuation risks and suffered lack of liquidity and transparency.”
For those who have long advocated for DC plan investments that more closely resemble those of defined benefit plans, what Intel did was surely different from what many DC plans have (as an example, the suit claims that as of September 2015, between approximately 27% and 37% of each of the Intel TDFs’ assets and approximately 56% of the Intel GDFs’ assets were allocated to “alternative” investments). In the words of the suit, they had an “outsize allocation to hedge funds, private equity, and other alternative asset classes as compared to professionally managed fixed asset allocation funds.” Indeed, the Intel fiduciaries opted to go with “customized asset allocation portfolios” created by the plan’s Investment Committee.
In fact, the suit explains that “until January 1, 2018, the Intel TDFs (dynamic asset allocation model) and GDFs (fixed asset allocation model) were not actual funds as there was no distinct legal entity such as a mutual fund or collective trust that held the investments” – though they were converted to CITs then, with Global Trust Company (GTC) appointed as the trustee for the Intel TDF and GDF CITs and GTC hired Watson Wyatt Investment Services, Inc., to advise it on asset allocation and sub-advisor selection for the CITs. At this point, the suit claims that, “In other words, after driving the retirement savings of thousands of Intel employees into the ditch, the Investment Committee turned the keys of the wreck over to someone else.”
Beyond the risk factor, the plaintiff here alleges that, “the Intel TDFs have consistently charged fees significantly higher than both actively-managed and passively-managed target-date series offered by professional asset managers, but the Intel TDFs had substantially worse performance, both in absolute terms and on a risk-adjusted basis” – an allegation he also lays at the feet of the actively managed GDFs.
Invoking a claim common to the genre of excessive fee litigation, the suit claims that, “Instead of using the Plans’ bargaining power to negotiate low-cost, better-performing investment options and benefit participants and beneficiaries, the Investment Committee selected and retained the high-cost and underperforming Intel Funds.”
Indeed, the suit claims that as of September 2015, “the fees for the Intel Funds in the 401(k) Savings were considerably higher – up to 940 % more expensive – than actively-managed and passively-managed investment alternatives with comparable investment styles and with similar or superior performance.”
On the other hand, the suit notes that, “in 2017, the expense ratios of the Intel TDFs in the 401(k) Savings Plan fell between 0.82% and 0.95%,” which the plaintiff argues were “considerably higher than comparable investment alternatives,” claiming that the Intel Target Date 2015 and 2020 Funds were “up to 956% more expensive than comparable investment alternatives offered by Vanguard and up to 171% more expensive than actively-managed alternatives offered by American Funds.” He makes the same claim regarding the Intel TDFs in the Retirement Contribution Plan, which the suit says had “expense ratios between 0.83 and 0.96%,” while he notes that the expense ratio of the Intel GDF in the 401(k) Savings Plan, “which had increased to 1.52% in 2017 from 1.25% in 2015, was also considerably higher than comparable alternatives.”
Oh, and as if the allegations regarding allegedly inappropriate investments in alternative assets wasn’t sufficient, the suit also implies a collusion of sorts with Intel Capital, noting that “the Investment Committee Defendants included in the Non-Traditional Investments Accounts, especially the Alternative Investments Fund Account, many investments that were provided by investment companies that had invested or would invest in entities that Intel Capital also had invested or would invest in. Many of these investment companies are private equity or venture capital investment firms.”
Lest there was any doubt as to the impact, the suit continues that, “by including in the Non-Traditional Investment Accounts numerous investments provided by investment companies that Intel Capital partnered with, the Investment Committee Defendants, including Executive Vice President of Intel and President of Intel Capital Arvind Sodhani and Corporate Vice President Treasurer of Intel Ravi Jacob, 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 and opportunities for market expansion or, by becoming co-investors, could assist Intel Capital in marketing itself to prospective customers or generating funding for them,” and in so doing “prioritized the interest of Intel Capital and Intel over those of the participants in the Plans and benefited Intel Capital and Intel.” More bluntly, the plaintiff states that, “the Investment Committee used the Plans’ assets to promote the investment interests of Intel Capital.”
The defendants in this suit are numerous – roughly eight pages of the 111-page suit are devoted to brief bio/descriptions of the various committee members and roles.
What This Means
Now, one might well wonder – hasn’t this situation already been litigated? Not surprisingly, the plaintiff doesn’t see it that way. The suit’s petition for class action status acknowledges, “Plaintiff and his counsel are not aware of any other lawsuit filed by any member of the Class concerning this controversy, other than (a) Sulyma v. Intel Corp. Inv. Policy Comm., No. 5:15-cv-04977 (N.D. Cal.), which was dismissed on statute of limitations grounds which dismissal was reversed by the Ninth Circuit Court of Appeals…which the Court consolidated with the Sulyma action.”
As for that “other than”, as noted earlier, the Supreme Court has opted to take on a review (Intel Corp. Inv. Policy Comm. v. Sulyma, U.S., No. 18-1116, cert. granted 6/10/19) of that decision by the U.S. Court of Appeals for the 9th Circuit which said that, “…‘actual knowledge’ means something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”
More precisely, the issue under consideration is “[w]hether the three-year limitations period in Section 413(2) of the Employee Retirement Income Security Act, which runs from “the earliest date on which the plaintiff had actual knowledge of the breach or violation,” bars suit when all the relevant information was disclosed to the plaintiff by the defendants more than three years before the plaintiff filed the complaint, but the plaintiff chose not to read or could not recall having read the information.”
Which may well mean that, once we have clarity on the definition of “actual knowledge,” this plaintiff might – or might not – have a leg to stand on.