A recent U.S. Supreme Court decision involving 401(k) claims could have broad implications for how advisors selling retirement plans communicate with sponsors and plan participants as well as the role of alternative investments in the plans.
Earlier this week, the land’s highest court ruled that Intel Corp could not narrow the window of time over which its 401(k) participants could sue over alleged mismanagement.
The justices upheld a lower court ruling reviving a class-action lawsuit first brought in 2015 against the Santa Clara, Calif.-based tech firm, Reuters writes.
Christopher Sulyma, a former engineer at the chip maker, claimed that Intel’s retirement plans and administrators breached their fiduciary duty by over-concentrating the plan in hedge funds and private equity investments. Those investments then underperformed, harming participants, Sulyma claimed.
Federal law generally requires suits alleging violations of the Employee Retirement Income Security Act to be brought within six years, or three years if the problem surfaces sooner, Reuters reports. Intel argued that plan participants knew about the problems with the alternatives in the plan from emails sent to them with links to documents describing the investments. The sponsor said that the claims therefore fell outside of the window under which claims are allowed, the newswire reports.
But Sulyma, who worked at Intel between 2010 and 2012, countered that he didn’t have “actual knowledge” of the alleged problems because the documents were only posted online and he didn’t read them, Reuters writes.
In 2018, the San Francisco-based Ninth U.S. Circuit Court of Appeals allowed the suit to proceed, arguing that the three-year deadline didn’t apply since Sulyma was only made aware of the availability of the facts of the violation, not the facts themselves, Reuters reports.
On Wednesday, the Supreme Court upheld the lower court’s decision.
The decision may have repercussions on how retirement plans handle disclosures about investments and suggests that plan participants would benefit from greater financial literacy — an area in which financial advisors may be able to help.
Intel demonstrated that Sulyma “repeatedly” visited the company web portal hosting the documents. Yet the Supreme Court ruled in Sulyma's favor because he testified to not recalling the materials, FA-IQ sister publication Ignites reports. The court's ruling may encourage plan sponsors to simplify disclosure delivery or pursue other measures, such as adding a checkbox asking participants to acknowledge that they’ve read the documents or otherwise requiring participants to confirm that they’ve read and understood such emails, Rick Pearl, a partner at McDermott Will & Emery, tells Ignites.
Lawyers also say the ruling has implications for the deadlines applied to filing 401(k) suits as well as for the place of alternative investments in 401(k) plans.
“The Intel v. Sulyma decision has made it clear that the full six-year statute of limitations under Erisa will apply to claims by 401(k) participants against plan sponsors in more circumstances, and on a nationwide basis,” Ropes & Gray tax and benefits partner Josh Lichtenstein tells FA-IQ in a statement. “This decision will make it harder for plan sponsors to limit their liability for 401(k) investment menu design decisions, and it may add further momentum to the ongoing wave of fiduciary breach and fee litigation class actions that have already resulted in hundreds of millions of dollars in settlements from plan sponsors," he wrote.
That the case hinges on alternative strategies adds another twist. In recent years, Blackstone CEO Stephen Schwarzman and other private equity industry leaders have pushed for regulators to allow broader use of illiquid strategies within 401(k) plan menus. Calling it a personal "dream," Schwarzman in 2017 cited the long-term nature of retirement plan investments as one reason the plans were perfect venues for what are often less-liquid investment products. Blackstone shortly thereafter bought the recordkeeper formerly owned by Aon and now named Alight Solutions.
“This decision is also noteworthy because it will allow the lower courts to assess the underlying question of whether Intel acted prudently when it decided to include alternative investments (such as hedge funds and private equity funds) in its plans,” Lichtenstein says.
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