The U.S. 9th Circuit Court of Appeals has ruled in favor of Intel Corp. fiduciaries, affirming the dismissal of a long-running lawsuit alleging the inclusion of alternative investments in the company’s two defined contribution plans was a breach of their fiduciary duties.

Last week, the appeals court affirmed the U.S. District Court for the Northern District of California’s dismissal of Anderson v. Intel Corp. Investment Policy Committee et al., concluding that the plaintiffs failed to plausibly allege a fiduciary breach under the Employee Retirement Income Security Act.

The case has an extensive procedural history that spans almost six years, including three separate complaints, as well as a decision by the U.S. Supreme Court that set a precedent to help clarify key aspects of the pleading standards that apply to fiduciary breach claims under ERISA.

Winston Anderson, a former participant in the Intel 401(k) Savings Plan, originally filed a complaint in August 2019, alleging that the plan’s trustees breached their duty of prudence by investing some of the plan’s assets in hedge funds and private equity funds. The private funds were underlying investments in custom target-date funds.

Anderson also argued that Intel breached its duty of loyalty by steering retirement plan funds to companies in which Intel’s venture-capital arm, Intel Capital, had already invested.

Failure to Prove Breaches of Prudence, Loyalty

The 9th Circuit affirmed the district court’s ruling that Anderson did not state a claim for breach of ERISA’s duty of prudence. Because prudence is evaluated prospectively and based on the methods the fiduciaries used, rather than retrospectively and based on the results they achieved, the appeals court argued it is not enough for a plaintiff to simply allege that the fiduciaries could have obtained better results; instead, they must provide some factual allegations.

According to the court’s opinion, Anderson made no direct allegation about Intel’s investment-selection methods and attempted to show a breach of the duty of prudence only through the “circumstantial route.”

In addition, the appeals court found that the district court correctly determined that Anderson did not plausibly allege that Intel’s funds underperformed other funds with comparable aims.

According to the appeals court’s opinion, Intel developed its own customized benchmarks for each asset class included in the Intel funds, which it disclosed to plan participants and beneficiaries. But rather than presenting a comparison to Intel’s composite benchmarks or to available funds with similar risk-mitigation strategies and objectives, the court found that Anderson sought to compare Intel’s funds to equity-heavy retail funds that pursued different objectives—typically revenue generation.

“As the district court observed, ‘simply labeling funds as ‘comparable’ or ‘a peer’ is insufficient to establish that those funds are meaningful benchmarks against which to compare the performance of the Intel funds,’” the appeals court wrote. “Anderson’s putative comparators were not truly comparable because they had ‘different aims, different risks, and different potential rewards.’”

The 9th Circuit also cited the Department of Labor’s 2020 information letter, which stated that “a fiduciary may properly select an asset allocation fund with a private equity component as a designated investment alternative for a participant directed individual account plan.”

While a plaintiff could make an imprudence claim by alleging that a plan invested much more in a particularly risky class of assets than other comparable plans, the appeals court found that Anderson did not allege that the hedge funds and private equity funds in which Intel invested were particularly risky, either individually or in the aggregate.

The appeals court found that Anderson failed to prove that the fiduciaries breached their duty of loyalty because the plaintiff did not plausibly allege a “real conflict of interest,” but the mere potential for a conflict of interest. The 9th Circuit agreed with the district court that Anderson did not allege that the Intel fiduciaries had any influence over any investment firm’s decision to “invest in one of the startups in which Intel [had already] invested.”

Implications for Including Alts in DC Plans

The Intel decision may provide some comfort to plan sponsors looking to provide access to private funds as part of a well-diversified retirement portfolio, according to law firm . However, the Intel litigation has dragged on for nearly seven years, which means plan fiduciaries may remain cautious.

The law firm argued that without an express statutory or regulatory safe harbor that provides a framework for a prudent evaluation of private market investments as a component of participant-directed defined contribution plans, plan sponsors could fear that offering such access could expose them to expensive and protracted litigation.

But with appropriate disclosure of the risks associated with private market investments, and the proper allocations, Debevoise & Plimpton stated that private funds can be “an important component of a well-diversified, long-term investment portfolio.”

The administration of President Donald Trump has indicated an interest in providing retirement savers with more access to private investments and is rumored to be considering an executive order to direct federal agencies to look into allowing private capital access for all U.S. retirement savers.