The Intel 401(k) Litigation

Do ERISA plans have the authority to innovate?

The plaintiff’s claim in the Intel litigation seems to indicate that ERISA investments, particularly participant directed investments, must stringently follow mainstream strategies and that deviation from such strategies is, per se, imprudent. But, many innovative investment developments have occurred since the passage of ERISA in 1974, and just a few are listed below:

  • Vanguard creates the first index fund in 1975 [The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy, Bogle, 1997];
  • Stable value investment options began to be offered in defined contribution plans in the late 1970s [Stable Value Investments Synthetic Investment Contract Basics, SVIA, 2013];
  • The first 401(k) is developed and goes live in January 1982 [Employee Benefit Research Institute, “History of 401(k) Plans: An Update”, 2005];
  • Emerging markets mutual funds are offered 1989 [New York Times, January 11, 1998 Mutual Funds Report; Emerging Markets: Nice Concept, Bad Outcome];
  • The first target date funds were introduced in late 1993 by Barclays Global Investors [Industry’s First Target-Date Fund Celebrates 15 Years Since Groundbreaking Launch, Barclays Global Nov 7, 2008];
  • Unified Trust creates the UnifiedPlan in 2007. This is a trustee managed individualized portfolio for each participant giving them an asset/liability solution.
  • Custom target date funds with varying asset allocation were discussed by the DOL in 2013 [Target Date Retirement Funds -Tips for ERISA Plan Fiduciaries, DOL Publication, February 2013]; and

In fact without innovation qualified plans would not hold index funds today. This is somewhat puzzling since many market commentators now say index funds are the only prudent investment for a retirement plan. While this may be an overstatement, the point is that ERISA practice standards of care evolve over time and are not static.

What fiduciary steps must be in place to prudently investigate and monitor such investments?

ERISA is based on fundamental principles of fiduciary trust management. [H.R. Conference Report 93-1280 at 456-460, 1974]. All restrictions on investments (including hedge funds) were eliminated when the “prudent investor” rule was adopted. [The Restatement (3rd) of Trusts, Prudent Investor Rule, and Uniform Prudent Investor Act, “UPIA”]

ERISA Section 401(a)(1)(B) deserves emphasis, as the phrase “under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters” is one of the core arguments used by the plaintiffs in the Intel case to claim a fiduciary breach occurred by using unusual investments. A simple way to think about it is if there is a room with 100 ERISA experts, the fiduciaries generally should be doing what at least 51 out of 100 experts would do.  The Intel plaintiffs are essentially arguing that “people familiar with such matters” (in this case standardized passive target date funds managed by Fidelity and Vanguard) would not hold these more risky and less well understood assets such as private equity and hedge funds.  However a theoretical counterargument could be made that the phrase “under circumstances then prevailing” indicates the investment structure may change over time depending on the needs of the participants.

Next Installment—we will further review what fiduciary steps must be in place to prudently investigate and monitor such investments.

 

About Greg Kasten view all posts

Dr. Gregory W. Kasten serves as Founder and CEO of Unified Trust Company. He has published more than 100 papers on financial planning and investment-related topics in various financial and business journals; written two editions of the book Retirement Success. In 2007-2009, Medical Economics listed Dr. Kasten as one of "The 150 Best Financial Advisers for Doctors" in the country. Dr. Kasten was inducted into the Advisor Hall of Fame by Research Magazine in 2011 and in 2013 was named Retirement Plan Adviser of the Year by Employee Benefit Adviser Magazine. He has more than thirty years of investment experience.