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Fiduciary Litigation Continues: Cautionary Reminder When Fiduciaries Don’t Delegate Responsibilities

Over the last decade, retirement plans and their participants have become much more dependent on “do-it-for-me” or professionally managed investment options. On the one hand, this largely benefits participants and moves us in the direction of defined benefit plans, which are commonly professionally managed. The “set it and forget it” approach typically serves participants well over time. On the other hand, unless plan fiduciaries have engaged a third-party fiduciary to accept responsibility for the management of these investment options, they retain – frequently unwittingly – that responsibility. We can see the risks associated with those responsibilities in a recent suit filed against the fiduciaries charged with managing Intel Corp’s plans.1

Background. Here’s a short version of the facts. The Intel committees oversaw a couple of defined contribution plans. The committees were in charge of the core funds list for each plan. From those core funds lists, they built and managed target-date funds (“TDFs”), as well as risk-based model portfolios (“Models”). The core funds lists were not your ordinary core funds lists; they included hedge funds, private equity funds, and commodities funds.

Plaintiffs’ Allegations. Here’s a short version of the plaintiffs’ allegations. Committees overseeing multiple multi-billion dollar plans: constructed the custom TDFs and Models from shockingly risky alternative investments; failed (until recently) to establish mutual funds or collective investment trusts to house the portfolios; failed to leverage the plans’ size to negotiate competitive fees; permitted the total costs to climb north of 1% and eventually some above 2% as recently as last year; and failed to make changes to dial down the risk or reduce the cost when the portfolios underperformed both active and passive peer group members for multiple years. Those events allegedly transpired due to a combination of negligence and conflicts of interest created by relationships with the companies managing the risky alternative investments.

Importance of Risk. The high-risk level of the TDFs and Models is at the heart of the complaint. The plaintiffs persistently criticized the high-risk investments; the complaint uses the term “hedge fund” 280 times. They also pointed out that the TDFs and Models not only used risky investments, but also used them at a high level – ranging from 27-37% of the TDFs at one point in time and 56% of the Models at one point in time.

Importance of Costs. At the end of 2017, the plans contained nearly $12 billion and more than $6.5 billion, respectively, in plan assets. The complaint alleges that the plans’ committees failed to exert their $18+ billion of leverage when negotiating TDF and Model expenses. For example, the TDF costs hovered between 82 and 109 basis points from 2014-2018, and the Models crept up from around 125 basis points to 208 basis points in 2018.

The plaintiffs were careful to note that the committees also failed to use collective investment trusts (“CITs”) to house the TDFs and Models. While there is no requirement that any particular plan use a CIT structure, billion-dollar plans are expected to have explored the opportunity.

Other Issues. In this case, the plaintiffs have other cards up their sleeves. For example, they also set forth strong arguments that the Intel committees were driven by conflicts of interest. They argue that the committees retained risky, expensive investments because those investments were managed by outside companies that were joint investors with Intel Capital on other investments.

Closing Thoughts. This case is only at the pleading stage. The defendants may very well succeed in challenging some or all of the claims. But no matter the result, this case serves as a reminder – as the Department of Labor clarified in its fiduciary regulation process – that plan trustees begin with the responsibility to manage (and understand what is inside) portfolios built from the core funds. They have the opportunity to engage a fiduciary to manage those portfolios, whether in the form of a recordkeeper platform product or a formal vehicle, such as a CIT. They have a responsibility to monitor that fiduciary’s decisions, particularly with respect to risk and cost. But if they don’t delegate any of those responsibilities, the plan’s fiduciaries retain them and must demonstrate diligence and prudence in fulfillment of their responsibilities.

Large plans like Intel’s are ripe targets for this type of lawsuit. They likely have the leverage, resources, and buying power to create better results for their participants. At the same time, large companies frequently retain fiduciary responsibilities like those at issue in the Intel suit, which increases the likelihood that conflicts of interest and personal preferences for aggressive investment options can cloud their judgment. We will all be watching to see whether that approach results in exposure for Intel’s fiduciaries.

1: https://www.napa-net.org/sites/napa-net.org/files/intel%202.pdf

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).

The preceding commentary is provided for informational use only and should not be considered investment advice. Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly.

Matthew Eickman
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