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Intel Lawsuit Regarding Hedge Fund and Private Equity Allocations

A participant in the Intel Retirement Plans, on behalf of two proposed classes of participants in the Intel 401(k) Savings Plan and Intel Retirement Contribution Plan, has filed a lawsuit alleging that the Plans’ custom investments are imprudently invested in risky and high cost hedge funds and private equity investments causing participants to suffer large losses and excessive fees.

The Intel Plans offer nine custom investment funds as core menu options. These custom funds are also the underlying funds for the asset allocation portfolios – the target date portfolios (TDPs) and the Diversified Fund (a balanced fund). It is alleged that beginning in 2011, the asset allocation models employed by the Plans’ investment committee differed from the “prevailing standards of professional investment managers and plan fiduciaries” with large allocations to hedge funds within the TDPs increasing from $50 million to $680 million (1,300%). During 2009-2014, exposure to hedge funds within the Diversified Fund increased from about $582 million to $1.7 billion (286%), and private equity increased in that fund from $83 million to $810 million (968%).

The plaintiff alleges the Intel TDPs have underperformed peer target date portfolios and the Plans have lost millions of dollars that would have otherwise been earned if the portfolios had been more prudently allocated. Likewise, the lawsuit claims the Diversified Fund has underperformed peer balanced funds due to the allocation to hedge funds and private equity. The complaint also alleges that the Plans’ administrative committee failed to disclose the risks, fees and expenses associated with investments in hedge funds and private equity to participants. Participants were only informed that such investments comprised the portfolios. No information regarding the strategy, underlying investments, risks or fees were disclosed.

Furthermore, it is alleged that the adoption of otherwise regarded best practices in the Intel 401(k) Plan, such as auto-enrollment and defaulting participants into the age appropriate target date portfolios in the absence of asset allocation elections, exacerbated the negative impact of the imprudent investments on plan participants.

The lawsuit reviews why hedge funds and private equity investments are not appropriate for ERISA retirement plans, stating that the increased allocation to hedge funds significantly increased expenses of the Intel TDPs and such allocations caused the portfolios to underperform target date fund indices. Further, the lawsuit argues that hedge funds are limited to “accredited investors” who meet certain income and net worth thresholds – those who can afford to bear a loss of principal. Also mentioned is the lack of transparency and regulatory controls associated with hedge funds, making it very difficult for a prudent fiduciary to evaluate performance and understand the strategy employed. Additionally, the lawsuit states that private equity is considered problematic given high fees and the resulting impact on returns, and potential issues regarding valuation practices employed by such managers.

wwww.planadviser.com; November 2, 2015.