Intel 401(k) ruling could bolster some class actions

A Supreme Court decision published Wednesday will make it easier for some plaintiffs to bring class actions for 401(k) fiduciary claims.

In a unanimous opinion, the court found that a three-year limit on filing claims does not apply simply because plan participants were provided with disclosures that in theory would allow them to see whether their assets are being mismanaged.

Instead, a six-year statute of limitations applies to most claims.

The decision sends a case against Intel Corp. back to a lower court, where plaintiffs can move forward with allegations that the company breached its fiduciary duty to 401(k) plan participants because of the plan's hedge fund and private-equity investments. Participants allegedly paid high fees and suffered losses because of those holdings.

Intel designed a custom target-date series for the plan, built in part with those underlying investments.

“It was always kind of a head-scratcher,” said Jason Roberts, CEO of the Pension Resource Institute. “Why did a company that makes computer chips want to stick its neck out and dabble in portfolio management?”

The ruling “is a big deal in the sense that the circuit courts were split,” he said. “Now we have definitively settled case law on it.”

Intel argued that the case should be dismissed because the lead plaintiff accessed online documents that provided information about the investments, meaning that he had “actual knowledge” of the alleged fiduciary breach.

The case was dismissed at the District Court level, though an appeals court sided with the plaintiff. The Supreme Court affirmed the appellate ruling, sending the case back to the District Court.

“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,” Ropes & Gray partner Josh Lichtenstein said in a statement. “The decision will be especially impactful for plan sponsors located in circuits that have traditionally been more willing to limit the period for damages to three years, and who may find themselves more likely to be targeted by class action suits in the future.”

The decision has further implications, as the lower court will now consider the underlying fiduciary claims, Mr. Lichtenstein said.

This Supreme Court’s decision “is going to impact the number of cases that get dismissed,” said Karen Handorf, partner at Cohen Milstein.

The Supreme Court's ruling is consistent with provisions in the Employee Retirement Income Security Act that treat defined-contribution plan participants as unsophisticated investors who cannot be expected to parse complicated disclosures about their plans and investments, she said.

In addition, the three-year limit, even for those who were aware of potential mismanagement, was troublesome, Ms. Handorf said. If a participant notices a poorly performing, high-fee investment, for example, they must wait years to suffer any harm before suing, and that harm often doesn’t happen until after three years, she said. Even the six-year limit can be difficult to meet.

“You’re sitting around waiting for yourself to be hurt, and six years and one day goes by – and you’re sunk,” she said.

The Supreme Court decision will affect the way plaintiff firms vet lead plaintiffs for class-action cases, said Kim Jones, partner at Faegre Drinker.

“That’s giving them some pretty clear details and a track for the plaintiffs to follow to determine who they should put up as their named plaintiffs,” Ms. Jones said.

However, being able to show that a plaintiff has thoroughly reviewed plan or investment documents is difficult, which means that the three-year “actual knowledge” window has been difficult for defendants to use, she said.

“I’m not sure how you prove an individual has read what’s in their disclosures,” Ms. Jones said. “That’s a challenge for the fiduciaries.”

Mr. Roberts said the ruling could encourage plan fiduciaries to be more careful about how they disclose things to participants.

“We may see some additional enhancements to disclosure delivery protocols,” he said.

That could include boxes participants would have to click to show delivery confirmation for fee disclosures or other documents, Mr. Roberts said. Plan service providers could also record meetings they hold with groups of participants to show that they had provided information about investments and fees, he added.

Such practices might not be sufficient to get cases dismissed, even on a procedural basis, but they could show that fiduciaries made an effort to inform participants about the details of the plan, Mr. Roberts said.