The U.S. Supreme Court on Tuesday will hear oral arguments in a case that could shape how Americans hold retirement plan fiduciaries accountable for investment decisions. At issue is how easily 401(k) participants can sue plan fiduciaries over alternative investments that lag index funds. The justices will decide whether a participant suing over underperformance has to identify a "meaningful benchmark" -- a comparable investment -- before the case can proceed. Some fiduciaries use alternative investments to cushion against market crashes, and the ruling will determine how high the legal bar is for lawsuits when those strategic decisions underperform the broader market.
The case, Anderson v. Intel Corp. Investment Policy Committee, was brought by former Intel employees who allege that plan managers violated the Employee Retirement Income Security Act's duty of prudence.
I've spent 30 years building and defending institutional portfolios that hold exactly the assets at issue here -- hedge funds, private equity and diversified alternatives -- and I've also served as an expert witness in the kind of fiduciary litigation this case is about to reshape. The question before the court isn't academic to anyone who has sat on an investment committee. In essence, it is this: How specific does a lawsuit have to be before a fiduciary's documented, reasoned judgment gets treated as a legal liability instead of prudent diversification?
After the 2008 crash, Intel added hedge funds and private equity to its custom target-date funds and a globally diversified fund. Its fiduciaries told participants that these assets should "provide greater downside protection in faltering markets, with the tradeoff being slight underperformance in rallying ones." A group of participants sued, arguing that the allocation lagged plainer stock and bond funds while charging higher fees. A district court dismissed the suit. The Ninth U.S. Circuit Court of Appeals affirmed the dismissal, holding that a complaint alleging underperformance has to point to a meaningful benchmark -- a genuinely comparable investment -- before a court will let the case proceed. It found the plaintiffs' comparators, from the S&P 500 to retail target-date funds, had "different aims, different risks, and different potential rewards."
The U.S. government's brief supporting Intel is worth reading closely. Similar to the Ninth Circuit's ruling, the solicitor general argues that the plaintiffs measured those funds against equity-heavy retail funds pursuing different objectives. Erisa fiduciaries, the brief says, "are not required to adopt a riskier strategy simply because that strategy may increase returns." The Labor Department's press release put it more bluntly: The strategy the plaintiffs seek "would force Intel to make significantly riskier investments for superficially higher returns."
That's a candid argument for the federal government to put in writing: that the price of downturn protection is underperformance when markets rally. The government doesn't ask for a new Erisa-only rule. It argues that a complaint ignoring different strategies and objectives fails under ordinary pleading standards and that a test of prudence should focus on "whether a fiduciary employed appropriate processes in making investment decisions, not on the later results of those decisions." In other words, the means, not merely the ends.
Industry groups also filed in support of Intel. The Investment Company Institute argues that a comparator may have a higher return "simply because it is more or less aggressive, diversified, or liquid," and warns that suits driven by later underperformance invite "defensive conformity" among plan fiduciaries. A coalition of seven business and retirement-industry groups argues that plaintiffs should have to plead comparators that are "actually comparable," not just any fund that happened to do better.
That argument doesn't occur in a vacuum. The Labor Department proposed a six-factor safe harbor for 401(k) fiduciaries in March, implementing an executive order on democratizing access to alternative assets. The factors are performance, fees, liquidity, valuation, benchmarking and complexity. A fiduciary that objectively and thoroughly analyzes these factors is presumed to have made reasonable judgments and gets significant deference. The department's proposal isn't final.
The benchmarking factor tracks the fight in Anderson v. Intel. The proposal defines a meaningful benchmark as "an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks." The drafters understood what Intel's lawyers are now arguing: that unusual strategies don't always have a clean twin against which they can be measured. The rule and the case are fighting the same fight from two directions. One asks what a fiduciary must analyze before choosing an investment. The other asks what a plaintiff must allege before suing over it. Both turn on the same word: benchmark.
None of this excuses 401(k) investment committees and plan fiduciaries from doing their due diligence. A fiduciary that wants the benefit of either the safe harbor or a friendlier pleading rule has to record its rationale when the decision gets made: what benchmark applies to this investment, why, and what fee load was built into the return expectation before the fact, not defended after it. Past performance is no guarantee of future results, but a documented, benchmarked, fee-adjusted judgment made in good faith is the only thing regulators, courts and plan participants have ever really had to go on -- and after this case, it may be the only thing that counts.
The pairing isn't a coincidence, and it isn't partisan window dressing either. The same administration that directed the Labor Department to re-examine its guidance on alternative assets is now telling the Supreme Court that a complaint comparing a downturn-protection portfolio to an equity-heavy fund shouldn't get past a motion to dismiss. A standard built on whichever fund performed best is litigation dressed up as diligence, not prudence. If the Supreme Court sides with Intel, fiduciaries that diversify for defensible reasons will answer for the process they used, not for whichever index happened to outperform them afterward.
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Mr. Rogers is president of Alpha Strategies Investment Consulting.
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