Court ruling on Intel’s DC plan sparks trepidation

The recent Supreme Court decision on Intel Corp. giving defined contribution plan participants more time to file ERISA claims unless they have "actual knowledge" of the plan sponsor's investment decisions and actions is prompting questions about litigation risk, options for sponsors to protect against it, and even whether alternative investments should be an option.

"Plan sponsors are frustrated and concerned about where they are supposed to go next in terms of providing information to participants," said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, one of several employer groups that backed Intel Corp. at the Supreme Court.

On Feb. 26, the Supreme Court said in a unanimous decision that Intel's investment policy committee could not enforce a three-year deadline for filing ERISA claims because receiving plan disclosures about investment lineups and changes and having actual knowledge of them were not the same thing. Current law established a six-year statute of limitations if the plaintiff does not have actual knowledge, but a three-year limit for those who do.

"The plaintiff must in fact have become aware of that information," said the opinion delivered by Justice Samuel Alito. (Several justices acknowledged during arguments that even they don't always thoroughly read disclosures.) The opinion recognized Intel's argument that the inter- pretation "substantially diminishes" protection for ERISA fiduciaries, but said that any changes would have to come from Congress.

With the timing question now answered by the highest court, the case, Sulyma vs. Intel Corp. Investment Committee et al., goes back to U.S. District Court in San Jose, Calif., to decide the merits of several claims raised on behalf of a potential class by Christopher Sulyma, a participant in two Intel defined contribution plans. The 2015 lawsuit alleged that plan managers violated their ERISA fiduciary obligations by offering too many alternative investments and inadequate disclosures of investments.

When they increased both plans' allocation to hedge funds and private equity after the 2008 financial crisis, Mr. Sulyma alleged, the decision violated ERISA's duty of prudence and caused losses from higher fees and lower investment returns relative to other funds. Intel, which said in its petition for Supreme Court review that it repeatedly disclosed information about the investments, including performance and fees, declined to comment on the Supreme Court decision.

Intel had $20 billion in DC assets as of Sept. 30, according to Pensions & Investments data.

One immediate impact could mean more lawsuits in the circuits where courts have until now upheld the shorter time frame. "Any company in those circuits now has to look back at what they did during a six-year period, from a plaintiff's perspective," said Joshua Lichtenstein, a partner with Ropes & Gray LLP in New York, who represents asset managers and plan sponsors. If the period for potential damages now doubles to six years, "we might see a whole new wave of litigation, just on the timing," he said.

The flip side of the Supreme Court decision is that advancing class actions could be a lot messier if plaintiffs need to prove what each class member actually knew, or whether there was "willful blindness," a legal term that would negate the six-year window. "It really could be a serious bar to class actions," Mr. Lichtenstein said.

The next practical steps for sponsors to consider are how to ensure that participants are not only receiving, but also understanding and accepting the information. "Plan fiduciaries need to talk with their service providers about how to have participants confirm that they've read and understood their disclosures with regard to investments and anything else in the plan," said Jan Jacobson, senior counsel for retirement policy with the American Benefits Council in Washington, another amicus brief signer supporting Intel.

Norm Stein, a Drexel University law professor who helped write the Pension Rights Center's Supreme Court amicus brief advocating the longer time frame, cautioned that sponsors "shouldn't be flooding people. The overload of information is probably as dangerous as not telling participants enough," he said.

Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association in Palm Beach Gardens, Fla., worries that the Supreme Court ruling "could have a negative impact on plan sponsors' willingness to innovate, which is unfortunate," he said. Yet it could create "even more momentum" for pooled employer plans, a concept boosted by enactment of the SECURE Act in December.

A third-party plan "potentially better aligns fiduciary responsibility with a party that's positioned to take on fiduciary risk. What we don't know yet is … will this throw additional fuel on the fire (sparking interest in pooled plans)? We will have to see how the market reacts and how plan sponsors view the trade-offs. We are at the early stages of how we can help both sides understand," Mr. Minsky said.

Another question to be addressed when the lower court decides the substantive claims of the Intel case is whether the risk of litigation has spooked sponsors away from offering alternative investments in their defined contribution plans, an area where Intel had been seen as an innovator, until the lawsuit.

"Alternatives are not per se imprudent, and fiduciaries who are considering (them) should not be dissuaded," said Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets in Washington, whose members are chief investment officers responsible for nearly $2 trillion in retirement assets. The key is documenting the investment decision process. "We are very confident that the state of the law today is that there is no presumption that they should be treated different. It's the process," Mr. Simmons said.

CIEBA's 2018 member survey found that 21.6% of defined benefit plan assets were invested in alternatives, which members consider crucial for diversification, particularly as the number of publicly traded companies continues to shrink.

To expand the same opportunities for defined contribution plans, CIEBA and other industry groups are pressing for the Department of Labor to send a clear signal.

In a July 2019 letter to DOL officials, CIEBA noted that Intel was "one of only a few corporate defined contribution plan committees to offer alternative investments," despite the potential for them to increase participant retirement income by 11% to 17% when included in target-date funds or other structured investments, according to research from the Georgetown Center for Retirement Initiatives.

That potential is not being tapped, CIEBA wrote, because its members "are keenly aware of the surge in class-action cases challenging the investments and fees paid" in defined contribution plans, and some cases "have promoted a potentially short-sighted school of thought that a plan fiduciary can only safely satisfy his or her ERISA fiduciary responsibilities by offering only passively managed index funds." By providing that guidance, DOL "could help fiduciaries modernize defined contribution plan investment," the letter said.