Supreme Court Justices Sound Skeptical of Intel 401(k) Suit at Oct. 6 Arguments

The Supreme Court spent Tuesday, Oct. 6, picking apart a fruit metaphor. The question underneath it: can 401(k) participants sue over a plan's weak returns without first pointing to a comparable fund that did better?

The case is Anderson v. Intel Corp. Investment Policy Committee. Based on the argument, the answer from the bench looked like no.

What the justices said

Justice Clarence Thomas framed the Ninth Circuit's reasoning bluntly: "you can't compare apples and oranges." A fund built for high but riskier returns, he said, can't be measured against one built to protect against losses.

Justice Elena Kagan, an Obama appointee, wasn't far off. Even setting aside the performance claims, she said, the employees need "another apple." It "doesn't have to be precisely the same apple," she said, but "it's got to be kind of an apple." She also called the lower court's dismissal "a pretty reasonable decision."

Justice Amy Coney Barrett pressed the employees' lawyer on the same point: "Don't you have to do that to decide if an apple is an apple?"

Justice Samuel Alito went at the performance argument directly. "Whether a particular strategy is reasonable or not cannot be judged based on how that strategy performed in one particular instance," he said.

Alito, Kagan and Justice Ketanji Brown Jackson all expressed puzzlement at parts of the employees' argument. The justices also said the employees' attorney had "shifted ground" away from presenting benchmarks as an apples-to-apples comparison. Ronald Mann, co-director of Columbia Law School's Charles Evans Gerber Transactional Studies Center, wrote in a SCOTUSblog analysis that several justices on the liberal side appeared to agree with Thomas.

The dispute

The suit traces to a 2019 class action by Winston Anderson, a former Intel employee who took part in two of the company's defined contribution plans. He alleges Intel's fiduciaries breached their duty under the Employee Retirement Income Security Act (ERISA) by putting parts of the plan's custom target-date and diversified funds into hedge funds and private equity.

According to the case materials, Intel raised those allocations after the 2008 financial crisis to guard against "faltering markets." The company acknowledged the tradeoff would be "slight underperformance in rallying ones." A long bull market followed, and the alternative-heavy funds lagged broad indexes such as the S&P 500.

The U.S. District Court for the Northern District of California dismissed the case. The Ninth Circuit upheld that ruling because the employees' comparisons to indexes like the S&P 500 and Morningstar benchmarks did not identify a fund with a similar objective.

The narrow issue before the Supreme Court is whether an underperformance claim must allege a "meaningful benchmark" to survive a motion to dismiss. The case does not ask whether hedge funds or private equity may sit in a 401(k) alongside stocks and bonds.

The workers' side

The employees told the justices the benchmark requirement is an unfair hurdle when fiduciaries make unusual choices that have no close match. They conceded some comparison is needed. They objected to fixing what counts as a relevant benchmark at the outset. As their lawyer put it, you can't compare apples to oranges, but the question is what is an apple and what is an orange.

AARP Foundation, which filed a brief supporting the employees, made the same case. "Workers deserve a fair chance to protect their retirement savings," said Louis Lopez, the group's senior vice president of litigation. "Requiring a nearly identical benchmark can shut them out of court when plan managers choose uncommon strategies with no close match. ERISA was meant to protect employees, not trap them in technical hurdles."

Medill on the Hill, Northwestern's Washington reporting program, reported that questions remained over how much guidance the court should give on defining and applying the term.

Why employers are watching

Plan sponsors are waiting on two things: this ruling and the Labor Department's finalized rules on alternative investments in 401(k)s. Asset managers are already building new products.

"I think companies want to know what's going to happen with the proposal and what's going to happen with the Supreme Court case before they go rushing in to change their investment strategies," said Elizabeth Hopkins of Hopkins ERISA Law. She is a former Labor Department senior trial attorney who filed an amicus brief for former high-ranking DOL officials.

Some advisers aren't waiting. Charles Field, co-chair of the financial mismanagement and ERISA litigation group at Sanford Heisler Sharp McKnight, said sponsors should have consultants compare their funds against a handful of others with similar risk and reward profiles, and document why. Other industry professionals recommend holding off on drastic benchmarking changes until the court rules, and a decision may not arrive until spring.

Liquidity is a separate worry that no ruling here will settle. Michael Diver of Katten said at the Securities Enforcement Forum Central that a retail investor's instinct is to call a broker and exit a position. Private equity and private credit come with redemption limits and illiquid portfolios. Margaret Nelson, national chair of Foley & Lardner's Securities Enforcement & Litigation Practice Group, has told advisers to scrub their ADV disclosures for conflicts, fees and valuation policies for illiquid assets.

Oral argument is not a ruling. The justices' written decision will say what a "meaningful benchmark" is, and that definition will determine how much a plaintiff must show before a case against a plan fiduciary gets past the first hurdle.