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Ninth Circuit:
ERISA Plaintiff Failed to Show Breach by Low-Risk Investing
Opinion Says Fact That Intel Corporation Fiduciaries Could Have Obtained Better Results Is Immaterial, Party Seeking to Show Breach of Duty Must Plead Comparison to Other Funds With Similar Goals
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals held yesterday that a putative class action complaint alleging that fiduciaries charged with managing Intel Corporation’s retirement plans breached duties of prudence and loyalty by investing in purportedly lower-return hedge and private equity funds, in some cases allegedly providing money to bolster startups supported by the company’s venture-capital arm, was properly dismissed for failure to state a claim.
Saying that plaintiffs asserting a breach of the duty of prudence based on circumstantial evidence purportedly showing that similar plans did better must provide a sound basis for comparison, the court concluded that the pleading failed to show that the other investment schemes operated with the same strategic goals.
Following the 2008 market crash, Intel announced that it was redesigning its funds so that they not only included traditional investments in stocks and bonds, but also hedge funds—or pooled investment vehicles that engage in active trading of a variety of assets—and private equity funds—or organizations dedicated to acquiring and managing companies with the goal of improving their financials before an eventual sale of the businesses.
Intel told plan participants that these changes were intended to decrease volatility and reduce the risk of large losses during a market downturn, but disclosed that the diversification strategy would mean that the funds may not always compare favorably with other plans that primarily hold portfolios of stocks and other equity securities.
In an opinion authored by Circuit Judge Eric D. Miller, the court found that the plaintiffs’ reliance on comparisons to purportedly similar plans that relied more heavily on traditional investment schemes was ineffective to circumstantially establish that the fiduciaries acted imprudently where there was no evidence presented to establish that those managing the other funds were making decisions based on a concern over volatility.
As to the duty of loyalty, the court said that the mere potential for a conflict of interest was not enough and held that the plaintiffs had not plausibly alleged any real divided allegiances, given the absence of assertions that the plan managers had any influence over the decisions of the venture-capital group.
Putative Class Action
The question as to the management of the retirement funds arose after former Intel employee Winston R. Anderson filed a putative class action complaint against Intel and the managers of the plan, under an ERISA section making such fiduciaries personally liable for breaches of their duties. He asked then-District Court Judge Lucy H. Koh of the Northern District of California (now a judge of the Ninth Circuit) to certify a class consisting of all plan participants whose accounts were invested in target-date funds, or ones that are adjusted to become more conservative as time goes on, or global diversified funds, or ones which invest in a variety of assets, after October 2009. The case was consolidated with one brought by another former employee, Christopher M. Sulyma.
In the operative consolidated complaint, the plaintiffs detailed how the relevant Intel funds underperformed when compared to arguably comparable alternatives, including indices showing the success of other funds published by stock-tracking services Standard & Poor 500 and Morningstar. The pleading also alleged that “hedge funds and private equity pose challenges and risks beyond those posed by ‘traditional investments’.”
Koh granted, without leave to amend, the defendants’ motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), concluding that the plaintiffs had not identified a “meaningful benchmark” against which to compare the performance of Intel’s funds and had not shown any self-dealing or any conflict of interest.
Yesterday’s opinion affirmed the dismissal. Circuit Judge Lawrence VanDyke joined in the opinion, as did Senior Circuit Judge Marsha S. Berzon, who also wrote separately to clarify the role of comparisons in duty-of-prudence claims.
Prudent Man Standard
Sec. 1104(a)(1)(B) of ERISA requires plan trustees to act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
Miller wrote:
“Because we evaluate prudence prospectively, based on the methods the fiduciaries employed, rather than retrospectively, based on the results they achieved, it is not enough for a plaintiff simply to allege that the fiduciaries could have obtained better results—whether higher returns, lower risks, or reduced costs—by choosing different investments. Instead, a plaintiff must provide ‘some further factual enhancement’ to take the claim across ‘the line between possibility and plausibility.’ ”
The jurist said that when a plaintiff argues that a prudent fiduciary in like circumstances would have selected a different fund, that party must provide a sound basis for comparison, pointing out:
“The need for a relevant comparator with similar objectives—not just a better-performing plan or investment—is implicit in ERISA’s text. By making the standard of care that of a hypothetical prudent person “acting in a like capacity…in the conduct of an enterprise of a like character and with like aims,” the statute makes clear that the goals of the plan matter.”
Comparable Aims
Concluding that “Anderson did not plausibly allege that Intel’s funds underperformed other funds with comparable aims,” he added:
“We do not hold that a plaintiff must always identify a comparator when relying on circumstantial allegations of a breach of the duty of prudence. But to the extent a plaintiff asks a court to infer that a fiduciary used improper methods based on the performance of the investments, as Anderson in part does here, he must compare that performance to funds or investments that are meaningfully similar.”
Anderson asserts that there are “no meaningful comparators for the fiduciaries’ decision” because Intel’s approach was “unusual, if not unparalleled.” Unpersuaded, Miller said”
“That argument conflates the risk-mitigation objective of the Intel funds with the allocation decisions made to implement that objective. Anderson’s complaint suggests that what he is really challenging is the former….But as the district court noted, ‘ERISA fiduciaries are not required to adopt a riskier strategy simply because that strategy may increase returns.’ ”
To the extent that Anderson is offering a per se challenge to hedge fund and private equity investments, the judge opined:
“It is possible that a plaintiff could make out an imprudence claim by alleging that a plan invested much more in a particularly risky class of assets than did other, comparable plans, even if investing in that asset class is not per se imprudent in smaller amounts….But Anderson has not plausibly alleged that Intel’s specific investments were imprudent at the scale it made them.”
Berzon’s Concurrence
Berzon wrote:
“I concur in full in the majority opinion. I write separately to clarify the role of comparisons and circumstantial allegations in duty-of-prudence claims.”
She explained:
“Even though comparative allegations are not required to state an ERISA imprudence claim, they can be useful— indeed, they are often the best way for a plaintiff to plead such a claim at the outset of a case. The reason is simple: ERISA’s duty of prudence is a standard of conduct rather than results. But plaintiffs generally will know only the outcome of a fiduciary’s decisions—which investments were selected, for example, and how those investments performed. They typically will not know details about the process by which these decisions were made—which other options were considered, or how and why certain investments were selected over alternatives.”
Noting that different types of comparisons may be appropriate based on the facts underlying a plaintiff’s claims, she opined:
“A benchmark investment comparison between two otherwise-identical investments that differ on only one characteristic, like fee amount, can suggest that the fiduciary who selected the worse of the two options acted imprudently. A plan-by-plan or aggregate comparison, by contrast, can suggest imprudence by demonstrating that the fiduciary’s actions were an outlier. Deviation alone may not be enough to suggest imprudence, but coupled with some reason why the fiduciary should have known at the time the decision was made that the aberrant allocation or investment decision would be imprudent, divergence could suggest that the fiduciary’s conduct fell short of the prudent person standard.”
Saying that “[t]he ultimate question, absent direct allegations about the fiduciary’s investment methods, is not how other plans were managed or what other investments were available, but whether the facts alleged—comparative or not—lead to the plausible inference that the actual process used by the defendant fiduciary was flawed,” she said:
“I agree with the majority opinion’s conclusion that Anderson has failed to plead facts that support his claim either directly or inferentially, and so concur in full in the majority opinion.”
The case is Anderson v. Intel Corporation Investment Policy Committee, 22-16268.
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