Why Plan Sponsors need Professional (Independent) Advice?

Dan McConlogue is the Director of Corporate Retirement Plans at Ritholtz Wealth Management. Dan is the principal and founder of Eleven O’Clock Associates, a retirement plan consulting firm based in Florida. Dan joined RWM at the start of 2016, as our Director of Corporate Retirement Plans.  His most recent post was The Evolution of Corporate-Sponsored Retirement Plans.


When I hand someone my business card — Director of Corporate Retirement Plans — I often get asked questions about what I’m working on or what I think of recent regulatory changes.

Recently, a plan sponsor asked me both of those questions.  “A lot” I said – and when pushed I cited several themes that were on my mind after our most recent Investment Committee meeting.  One in particular is ‘under reported’ and very interesting:

“I think the Intel lawsuit is one that every Investment Committee for every large scale 401k plan in the United States ought to be familiar with. It’s a bit like the Wal-Mart lawsuit – where in the plan sponsor was found negligent for failure to provide the participants with lower cost mutual fund shares – which their assets qualified them for – only a lot worse.”

I went on to share the recent story from Bloomberg BNA News (October 30, 2015) on class action lawsuit directed at the Intel 401k Investment Committee – specifically addressing changes made by that IC which were so poorly conceived, expensive, and probably inappropriate per regulatory standards as to give the members of that Investment Committee a lot of sleepless nights. And it should…the story is a cautionary tale.

In a span of less than 4 years – the Intel Investment Committee took the plans investment options and changed them by a magnitude of 10 fold – taking $50 million of “Alternative Investments” and raising that amount almost $700 million in just a few years. Worse – they (the investment committee) ‘directed’ that these expensive and not exactly appropriate ‘securities’ be added to the seemingly vanilla Target Date Funds that they themselves designed.

Did Intel plan participants truly – rank & file workers – understand what was under the hood of those Target Date Funds? As the complaint states, the Investment Committee “invested a significant portion of the plans’ assets in risky and high-cost hedge funds and private-equity investments.”

I asked the plan sponsor: What’s the difference between doing what Intel has allegedly done versus what other Investment Committees do by the score? Only instead of hedge funds or private equity, they left “unnecessarily high cost, high turnover – and often poorly performing mutual funds, on their plan platforms?”

In terms of performance and fees, mutual funds can be just as pricey and under-performing as those alternative investments in Intel’s plan.

What is worse is the lack of process these Investment Committees are using for their due diligence and ongoing monitoring of the investment selections. This is a ‘process’ that should/could keep them in compliance with all regulations, and dramatically reduce their individual fiduciary liability.

Unless they mess it up badly, which the lawsuit alleges is exactly what the Intel investment committee did.

My conclusion:

“Really smart people, who in all likelihood wanted to do the right thing for their fellow employee participants, totally missed what they were meant to be doing, and how they were meant to be acting in the best interest of the plan participants – as mandated by law.”

Here again from the Bloomberg article (emphasis mine):

“The complaint, filed Oct. 29 in the U.S. District Court for the Northern District of California, alleges that the plans’ fiduciaries deviated significantly from professional investment norms when they dramatically altered the plans’ asset allocation models to invest in the hedge funds and private-equity investments.

As many as 100,000 Intel employees who participated in the 401(k) plans could be included in the lawsuit if the case is certified as a class action under the Employee Retirement Income Security Act.

The main defendant in the lawsuit is Intel’s investment policy committee that was charged with oversight of the investments in Intel’s two defined contribution retirement plans.” (emphasis added)

It is astounding that a firm with a plan that size, a company with resources as vast as Intel’s could screw up their retirement plans so royally.

Inappropriate decisions on plan assets happen all the time. People get emotional, have cognitive failures, act out of ignorance. However, I assume that in most cases these errors occur not because the investment committee was choosing expensive and ill-suited hedge and/or illiquid private equity funds, but because of these human errors.

On the whole plan fiduciaries have no idea what their individual liability is, what is expected of them as stewards of their company plans. All too often, the board lacks sufficient experience and independence to guide them through the prudent process of being a plan fiduciary.

Here’s a final sobering thought, from the legal complaint itself:

“The Investment Committee’s allocation decisions not only deviated greatly from prevailing asset allocation models adopted by investment professionals and plan fiduciaries, but also exposed the Plans and their participants to unreasonably costly and risky investments in hedge and private equity funds.”

The complaint goes on to allege that “Intel’s Target Date Funds (TDFs) underperformed peer TDFs by approximately 400 basis points annually” — that is 4% a year! The complaint alleges that the plans have lost “hundreds of millions of dollars” they would have earned if the Intel TDFs had been prudently allocated.

I have been doing this a long time, and over those years I have only heard about a dozen or so Intel-like stories in 401k land; However, experience suggests there could be thousands of Wal-Mart-like 401k retirement stories in the wild.

The days of having your former college roommate or brother in law ‘sell’ you a 401k plan – loaded with financial incentives for that brother in law – are over. Plan Sponsors and those who serve on Defined Contribution Investment Committees are on notice – they have real, quantifiable fiduciary responsibilities — and legal liabilities — on which they will be judged.

It isn’t hard to meet these responsibilities – it just requires guidance without conflict of interest – and a firm grasp on the concept of ‘acting always in the participants’ best interest.’

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