Groups Side With Intel in ‘Actual Knowledge’ Case

In a brief of amici curiae filed with the U.S. Supreme Court, they argue that an appellate court decision undermines the value of retirement plan disclosures and should be reversed.

A group has filed a brief of amici curiae in the case of Intel Corporation Investment Policy Committee v. Sulyma, asking the Supreme Court to reverse a decision made by the 9th U.S. Circuit Court of Appeals.

The U.S. Supreme Court granted a petition for writ of certiorari filed by the Intel committee asking the court to determine whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act (ERISA).

The original lawsuit said Intel invested participant assets in custom-built target-date funds (TDFs)—which included alternative investments—that have underperformed peer funds by approximately 400 basis points annually. The lawsuit claimed automatic enrollment and a re-enrollment of existing participants resulted in more than two-thirds of participants being allocated to custom-built investments. The text of the complaint goes into great detail about why the plaintiffs believe hedge funds and private equity funds are inappropriate investments for ERISA retirement plans.

In April 2017, a federal district court judge found the claims were time-barred under ERISA’s three-year statute of limitations. U.S. Magistrate Judge Nathanael M. Cousins of the U.S. District Court for the Northern District of California found that the plaintiff had actual knowledge of the facts underlying his substantive claims because financial disclosures sent to plan participants over the years provided information about plan asset allocation and an overview of the logic behind investment strategy.

However, the 9th U.S. Circuit Court of Appeals overturned the decision in December 2018 and remanded it back to the District Court, finding that the lower court used an errant interpretation of “actual knowledge.”

The appellate court’s decision said: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred.” It concluded: “In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed. The exact knowledge required will thus vary depending on the plaintiff’s claim.”

In their brief, the National Association of Manufacturers, the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (SIFMA), the American Benefits Council, the ERISA Industry Committee and the American Retirement Association note that breach of fiduciary duty claims under ERISA ordinarily must be filed within six years of the alleged breach. If the plaintiff learns of the breach earlier, Section 413(2) of ERISA shortens the limitations period to “three years after the earliest date on which the plaintiff had actual knowledge of the breach.”

They say, “In an action challenging the prudence of a retirement plan’s investment strategy, the three-year limitations period begins to run when the plaintiff has actual knowledge of the mix of investments [the plaintiff] claims [is] imprudent.”  They add that ERISA makes it easy for plan participants to learn this information by requiring plans to disclose investment options to them in simple-to-understand language that informs them of their rights and obligations. Citing the Supreme Court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch, the groups say Congress adopted these disclosure requirements to “ensur[e] that ‘the individual participant knows exactly where he stands with respect to the plan.’”

The brief notes that the plan here made the required disclosures, and the plaintiff actually received them. However, the groups suggest, the 9th Circuit held that the plaintiff could avoid the three-year statute of limitations simply by disclaiming that he read (or could recall having read) those disclosures. “The decision breaks with the near-uniform, common-sense rule in numerous federal courts that disclosing information to plan participants gives those participants actual knowledge of the information disclosed. The decision is wrong, it seriously undermines the important protections provided by the three-year limitations period, and it threatens to exacerbate the growing trend of meritless litigation against ERISA plans and plan fiduciaries. It should be reversed,” the groups argue.

While the term “actual knowledge” may mean different things in other contexts, “here it must include required disclosures that Congress designed to inform plan participants about their plans,” they continue. The groups argue that the original codification of the limitations provisions provides further evidence that actual knowledge includes information in required disclosures, because Congress originally charged plan participants with potentially having actual knowledge that comes from an even more indirect source of information—reports that are filed with the Secretary of Labor and never even sent to plan participants. The brief explains that, as originally enacted, the statute provided that the limitations period to allege a breach of fiduciary duty in violation of ERISA could be triggered either by “actual knowledge” of the violation or “constructive knowledge” of information reported to the Secretary under ERISA’s reporting rules. The groups contend the statute did not separately address plaintiffs’ knowledge of information furnished directly to plan participants under ERISA’s separate disclosure rules because that information was already covered by the statute’s “actual knowledge” provision.

“Furnishing disclosures to plan participants ensures that they have ‘actual’ knowledge of the information disclosed, so Congress did not need to separately charge those participants with ‘constructive’ knowledge of the same information.  The only tenable reading of the statute as enacted, therefore, is that plan disclosures give rise to actual knowledge,” the brief states.

The groups also argue that by informing participants about their plans (including available investment options), the disclosure requirements are also designed to assure plan sponsors and fiduciaries that participants are accountable for the information disclosed to them.  “Plan sponsors and fiduciaries also rely on the three-year statute of limitations to create predictability about the plans’ exposure to potential liability. That system breaks down if participants can disclaim knowledge of the information disclosed to them,” the groups say.

They point out that there is no way to ensure that participants actually read the disclosed information or to verify that they have done so. Therefore, the three-year statute of limitations cannot serve its purpose of creating certainty about potential liability if there is no objective basis for plan sponsors and fiduciaries to ensure that plan participants are sufficiently informed of their rights to trigger the limitations period.

The groups also argue that the 9th Circuit decision exacerbates the threat that plan sponsors and fiduciaries will face legal challenges to their investment strategies based on hindsight alone. “While ERISA requires, and courts recognize in theory, that the prudence of an investment decision must be judged in light of the information available to the fiduciary at the time of the decision rather than in hindsight, triers of fact often struggle in practice to avoid the natural tendency toward hindsight bias in evaluating past decisions,” they contend. “Even where courts ultimately reach the correct outcome, plan sponsors and fiduciaries may incur significant costs in defending themselves from meritless, hindsight-based claims.”

The groups say ERISA’s three-year statute of limitations mitigates the risk of hindsight bias by requiring plan participants to decide whether to challenge adequately disclosed investment strategies promptly—with the benefit of only three rather than six years of hindsight.