Earlier this month the Supreme Court heard arguments in Anderson v. Intel, and one moment showed where we need to pay attention. Justice Clarence Thomas said the lower court was basically telling the plaintiffs you can’t compare apples to oranges.
Anyone who has sat on a plan committee knows that feeling. The Court hasn’t ruled yet, but the argument gave employers plenty to think about.
What the case is about
After the 2008 crash, Intel moved a sizable share of two 401(k) target-date funds into hedge funds, private equity and commodities to soften losses in down markets. It worked in the bad years. Then stocks took off, and the funds trailed the equity-heavy target-date funds most people know.
The plaintiffs said that gap showed the committee wasn’t doing its job. The lower courts disagreed, saying underperformance has to be measured against something with similar goals, risks and strategy. At the argument, nearly everyone accepted that idea. The real fight was over what counts as meaningful.
Every fund needs a job and a yardstick
The Department of Labor backed Intel’s committee with a simple point. ERISA looks at how you made a decision, and a fund that lagged doesn’t on its own prove the process broke down.
What has helped Intel so far is that its committee could explain what those funds were for and had built benchmarks to measure them. Plenty of committees can’t say the same. A fund has filled the same slot for eight years, and the benchmark in the quarterly report is whatever the recordkeeper put there.
The DOL’s proposed rule on investment selection would ask fiduciaries to choose a meaningful benchmark for each investment. It’s a good habit either way. Naming the yardstick up front also names the job.
Be honest with employees about the trade-offs
People in Intel’s funds gave up real growth during one of the best stretches the market has ever had. That adds up over a career.
A defensive strategy can still be the right call, and many employees feel better with one. They just deserve to know the deal. If your default fund is built to protect on the downside, say so plainly, along with what it might cost in a strong market.
Clear rules leave room for better design
If any fund that trails the S&P 500 can end up in court, employers will strip their menus down to the cheapest index funds and stop asking what their people need. A fair benchmark standard leaves room for custom target-date funds, managed accounts and retirement income options, as long as the homework is done. It should still catch the plans that really are poorly run.
What we’d do before the ruling
- Name a benchmark and a comparable peer group for every fund in your investment policy statement.
- Document custom benchmarks for any custom or blended funds, and why they fit.
- Record each fund’s purpose in committee minutes and review it against that purpose every year.
- Look past returns to fees, risk and how the fund behaved in both up and down markets.
- Explain what each core option is built to do in your participant materials.
Read more about the case here.
