One reason that retirement plan litigation is so harmful is because it penalizes employers for offering their employees valuable retirement benefits by dragging them into expensive litigation. Another reason is that it siphons money away from retirees and into the pockets of the plaintiffs’ bar.
But beyond these costs, retirement litigation is also harmful for another very concerning, yet underappreciated, reason – it discourages plan fiduciaries from innovating and from offering new products and services. Plan sponsors who invest their time and resources into developing new and innovative strategies have to worry that any departure from the norm will quickly attract lawsuits. Unfortunately, given the current environment, these worries are not unfounded.
Notwithstanding this current landscape, in May, the Ninth Circuit Court of Appeals affirmed an important win for an innovative employer when it ruled that the employer’s – in this case, Intel – use of hedge funds and private equity investments as part of a risk mitigation strategy for its defined contribution (DC) plans did not violate ERISA. This ruling dismissed what amounted to a dressed-up underperformance claim seeking to present the unique aspects of alternative investments as per se imprudent, instead of, as required, alleging any facts that would allow a court to infer a breach.
But the ruling was definitely not all good news, as some have reported. As discussed below, the Ninth Circuit effectively provided future plaintiffs with a clear roadmap for filing suits that might be more successful, such as by alleging that a plan invested in “risky” assets more than comparable plans.
This Ninth Circuit roadmap for plaintiffs comes at a very interesting time as alternative investments – especially private equity investments – have recently gained significant attention from plan sponsors, advisors, service providers, and Washington policymakers. Most notably, on August 7, 2025, the President issued an Executive Order (Order)[1] directing the agencies, particularly the Department of Labor (DOL), to take steps to facilitate the offering of alternative assets in defined contribution plans. Among other directions, the Order specifically instructs DOL to: (1) consider revoking the Biden Administration’s 2021 Supplemental Private Equity Statement, which was decidedly negative on alternative assets; and (2) issue guidance, including a possible safe harbor, that would assist fiduciaries prudently evaluate the potential risks and rewards associated with alternative assets.
Although the Order’s policies and directions on the use of alternative assets are helpful and will have important ramifications for ERISA fiduciaries, the Order is most interesting for its recognition of the fact that ERISA litigation has been stifling retirement plan investment innovation. The Order directs DOL to curb such litigation, so that fiduciaries can use their best judgment regarding the investments that best benefit their participants, rather than picking investments to reduce the chance of being sued. We certainly applaud this initiative to address litigation reform, and the possible safe harbor referenced above. Both would greatly benefit the retirement plan system, which has been under attack from plaintiff firms for years, as a whole and not just benefit investments in alternative assets.
This litigation issue is the key point. Rescinding the Biden guidance seems like low-hanging fruit, and likely to occur, but it will not address the litigation concerns about offering alternative assets. Furthermore, the prospect of a simple clear investment safe harbor that would protect employers from liability is something we would all like, but that is far easier said than done. So, what can DOL do to address the litigation risk? Perhaps it can take a more active role in filing amicus briefs opposing the baseless litigation that has been allowed to flourish. And perhaps it can lead the way on legislative litigation reform, though that faces challenges from Congressional Democrats, whose support would be needed.
Until there is fiduciary litigation reform – whether legislative or judicial – the ever-increasing risks of litigation will deter many employers from offering alternative investments within retirement plans. Plaintiff lawyers “love” innovations, like alternative assets, that may cost a little more, because such innovations make it easier to sue the plan fiduciary. As soon as such assets have a bad year or two, the lawsuits will very likely be filed alleging underperformance and high fees. If the courts let those lawsuits survive the motion to dismiss, as generally happens, that is the plaintiff lawyers’ dream come true. For these reasons, notwithstanding the Ninth Circuit decision and the Order, we expect many plan sponsors to be hesitant about offering alternative assets in their DC plans, even with helpful guidance from DOL.
Key Point #1: The plaintiffs brought a dressed-up underperformance claim attempting to present the unique aspects of alternative investments as per se imprudent.
In the Ninth Circuit case – Anderson v. Intel – the plaintiffs argued that Intel breached its fiduciary duty of prudence by incorporating alternative assets, especially hedge funds and private equity investments, into investment portfolios that Intel offered to its DC plan participants. But to fully understand the Ninth Circuit’s ruling, it is important to first consider exactly what Intel did.
Following the 2008 financial crisis, Intel’s investment committee decided to adjust the allocations for two of the primary investment options offered to employees participating in Intel’s DC plans: (1) a custom target date fund (TDF) series; and (2) Intel’s Global Diversified Fund (GDF). More specifically, in an effort to increase diversification, reduce volatility, and enhance the plan’s overall performance, Intel reallocated its TDFs and GDF to maintain significant holdings in hedge funds, private equity investments, and commodities – a group of investments that the district court categorized as “non-traditional investments.”
When implementing that decision, Intel informed participants about these changes, why they were being made, and the impact that the changes could have on participant investments. As noted by the Ninth Circuit, “Intel told participants that its new strategy was aimed at decreasing volatility and reducing the risk of large losses during a market downturn. It also disclosed the price that participants would pay for this risk mitigation: Because of their broad diversification, the funds would not compare favorably with equity-heavy funds during bull markets.”
Just before the plaintiffs filed their initial lawsuit, Intel’s TDF series had between 27% and 37% invested in non-traditional investments. Intel’s GDF had 56% of its assets allocated to non-traditional investments.
In 2015, a group of plaintiffs sued Intel for its portfolio adjustments and supported their fiduciary mismanagement claims with three arguments. First, the plaintiffs argued that Intel breached its fiduciary duties by investing in hedge funds and private equity investments that were, in the plaintiffs’ view, simply too risky and too expensive. Second, the plaintiffs argued that Intel breached its fiduciary duties by creating portfolio allocations that “departed dramatically from prevailing standards employed by professional investment managers and plan fiduciaries.” Essentially, they argued that Intel’s strategy was wrong because it was too different from what most other fiduciaries were doing. And third, the plaintiffs bolstered their fiduciary claims by arguing that Intel’s investment choices, especially their heavy concentration in hedge funds, caused the plan’s investments to underperform other investment options that were broadly available in the marketplace. In terms of comparisons, the plaintiffs’ complaint contained numerous figures and charts comparing the performance of Intel’s funds, which had significant holdings in alternative assets as a means to accomplish Intel’s risk mitigation strategy, to other available funds and indices that were allocated almost exclusively to stocks and bonds.
While the plaintiffs offered no factual evidence of a flawed fiduciary process, they argued that Intel could not possibly have invested in hedge funds and private equity investments, or at least not in the proportion that they did, had they “given appropriate consideration to facts and circumstances relevant to the purposes of the Plans, in light of the risk of loss, opportunity for gain, diversity and liquidity.” Accordingly, this was not a challenge to the fiduciary process that Intel utilized. This was a challenge to the use of alternative investments simply because they were alternative investments and, with the benefit of hindsight, a challenge to the performance of Intel’s funds, as compared to otherwise available funds that were more heavily weighted towards equity markets.
Key Point #2: The Ninth Circuit correctly rejected the plaintiffs’ per se challenge to the use of hedge funds and private equity.
While much of the Ninth Circuit’s opinion is focused on affirming the lower court’s dismissal of the plaintiffs’ underperformance claims because the plaintiffs failed to plead a “meaningful benchmark” (more on that aspect below), the Ninth Circuit’s opinion is just as notable for its clear rejection of the plaintiffs’ per se challenge to the use hedge funds and private equity as part of a DC plan investment portfolio. Relevantly, in rejecting this argument, the Ninth Circuit pointed to the text of ERISA, regulations and sub-regulatory guidance from DOL, and applicable case law rejecting “generalized attacks on hedge funds and private equity funds as a category.”
The key takeaway from this analysis was that, in isolation, the Ninth Circuit was unwilling to view any particular investment or asset class as inherently too risky. Instead, the Ninth Circuit appropriately recognized that ERISA requires that the prudence of any given investment be reviewed in relation to the portfolio as a whole. In this regard, the court noted that there may be cases in which “an investment in a risky security as part of a diversified portfolio is . . . an appropriate means to increase return while minimizing risk.”
The Ninth Circuit’s unwillingness to accept the plaintiffs’ per se attack on the use of hedge funds and private equity investments reaffirms the flexibility and discretion that ERISA was intended to afford fiduciaries as they evaluate potential investment options for their plans. While certain asset classes, including those used by Intel, undoubtedly bring their own unique risks and challenges, ERISA does not categorically bar any of these investments for use in retirement plan portfolios.
Fiduciaries are responsible for evaluating the potential risks and rewards of investments, not the courts. This is a fundamental feature of ERISA that must be universally recognized and upheld in order to encourage innovation. In an important test for this precept, the Ninth Circuit got this issue right.
Key Point #3: Concerningly, the Ninth Circuit failed to rule out more refined challenges.
While the Ninth Circuit correctly rejected the plaintiffs’ claims that essentially amounted to a per se challenge to specific asset classes, it concerningly left open the possibility to more refined challenges that could be brought in the future against plan fiduciaries who seek to innovate through the use alternative investments. Specifically, after ruling out the plaintiffs’ per se challenge, the Ninth Circuit nevertheless stated that, “It is possible that a plaintiff could make out an imprudence claim by alleging that a plan invested much more in a particularly risky class of assets than did other, comparable plans, even if investing in that asset class is not per se imprudent in smaller amounts.”
In identifying this potential route for future claims, the point that the Ninth Circuit was apparently trying to make was that, if the plaintiffs had identified specific hedge funds or private equity funds that were “particularly risky,” instead of simply arguing that such funds are too risky as a category, the court might be willing to entertain fiduciary challenges asserting that a plan invested too heavily in such funds. Thus, while much of the court’s opinion is encouraging to plan sponsors considering alternative assets, this aspect of the opinion jumps out as a concerning and wholly inadequate standard for assessing fiduciary claims.
For example, what would make an investment “particularly risky”? What would constitute a “comparable plan”? How much more would the targeted plan have to invest than any comparator plans? And how are courts better equipped than plan sponsors to assess these issues? These vague standards leave too much discretion to reviewing courts and are unfortunately consistent with a broader trend in ERISA litigation – i.e., even when courts can appropriately dismiss some of the most suspect claims against plan sponsors, plaintiffs still have far too many avenues to pursue meritless claims against them.
Key Point #4: The Ninth Circuit applied the “meaningful benchmark” test to dismiss the plaintiffs’ claims, but is that really the right test?
Because the test of fiduciary prudence is a test of process, courts reviewing fee and performance claims have generally rejected fiduciary malpractice claims unless the plaintiffs can either: (1) identify an actual flaw in the decision-making process employed by the plan’s fiduciaries; or (2) offer circumstantial evidence from which the court may reasonably infer that the process was flawed. The “meaningful benchmark” test is a standard that courts have applied as a hurdle to the latter category of claims.
Pursuant to the meaningful benchmark test, a plaintiff’s claim may only proceed based on circumstantial evidence if the plaintiff can identify some comparator investment that is “meaningfully similar” in terms of its aims, risks, and potential rewards to the challenged investment. Absent such a comparator, underperformance and excessive fee claims based on circumstantial evidence must fail.
Even though some courts may have gone astray on this point, we should all be able to agree that an allegation of underperformance needs to, at the very least, be based on a meaningful benchmark. But in a workable world, courts would further insist on plaintiffs actually identifying flaws in the decision-making process of any plan fiduciary, rather than relying on comparisons of past investment performance. We say this because, even if plaintiffs identify a meaningful benchmark, claims based solely on past underperformance should not be enough to second guess fiduciary decisions. Otherwise, all plans would be compelled to chase the hottest fund, without regard to its future outlook. This would constrain all ERISA plans to buying high and selling low, which is a formula for failure.
Going back to the Intel case, the Ninth Circuit applied the meaningful benchmark test to dismiss the plaintiffs’ imprudence claims, agreeing with the district court’s findings along the same lines. While the plaintiffs’ complaint included many comparisons between Intel’s funds and alternative funds, such as Intel’s TDFs to other available TDFs, the Ninth Circuit ruled that the district court got it right when it found that the plaintiffs failed to plausibly allege a fiduciary breach because none of the purported comparators – whether specific funds, indices, or hypothetical allocations – shared the same aims as the Intel funds.
The problem, as detailed by the district court and affirmed by the Ninth Circuit, was that the Intel funds were specifically designed to include a high concentration of alternative assets in an effort to mitigate against the risk of loss in down markets. To achieve that aim, the Intel funds included a higher percentage of alternative assets, including hedge funds, and a lower percentage of equity assets in comparison to other available funds and benchmarks that served as the basis of the plaintiffs’ comparisons. Accordingly, because all of the plaintiffs’ alleged comparators – which had much larger equity concentrations – did not share the same aims as the Intel funds, they did not provide a meaningful benchmark, and their claims had to be dismissed.
Intuitively, this makes sense. If an investment portfolio has been designed to mitigate risk in such a way that it reduces its allocation to equities – thereby accepting potentially lower returns in exchange for lower risk – it would simply be unfair to compare that fund’s performance to a fund that has been designed to invest more heavily in equities. As the Ninth Circuit correctly pointed out, a standard requiring anything less would effectively allow plaintiffs to challenge a fiduciary’s overall investment strategy rather than their implementation. In this regard, ERISA does not require fiduciaries to maximize returns without regard to risk and does not prevent them from seeking to minimize risk.
Key Point #5: The Supreme Court has recently shown interest in the “meaningful benchmark” test.
In recent months, on multiple occasions, the Supreme Court has shown interest in the meaningful benchmark test and whether it should be a condition for plaintiffs bringing lawsuits with nothing more than performance comparisons. Through the Intel opinion, the Ninth Circuit has joined the Seventh, Eighth, and Tenth Circuits in requiring a meaningful benchmark for claims asking courts to infer imprudence based solely on these types of comparisons. As an outlier, however, in a very concerning ruling against an employer from last fall – Johnson v. Parker-Hannifin – the Sixth Circuit ruled that a meaningful benchmark is not required in order to plead an imprudence claim based on underperformance, and ruled in the alternative that a specified index was a meaningful benchmark for a fund solely because the fund was passively managed.
Parker-Hannifin appealed the Sixth Circuit’s decision to the Supreme Court, and in April, the Supreme Court asked the parties for additional briefing. More recently, in June, the Supreme Court asked the Solicitor General for the views of the United States on the question presented to the Supreme Court through Parker-Hannifin. As of this writing, the Solicitor has not filed a brief and the Supreme Court has not announced whether it will hear the case.
Given the importance of this issue, on May 21, Encore Fiduciary filed an amicus brief urging the Supreme Court to accept the Parker-Hannifin case so that it may clarify the pleading standards for fiduciary breach claims based solely on hindsight performance measures. Encore’s brief identified how lower courts have misconstrued ERISA by treating bare investment comparisons as plausible grounds for fiduciary misconduct, provided concrete figures on just how costly litigation has become for plan sponsors, and explained why, at a bare minimum, a meaningful benchmark requirement is necessary to assess investment performance claims and rein in abusive litigation. And the brief went further, making the critical point about underperformance cases:
Chasing the last year’s top performers, or jettisoning a long-term investment just because it underperformed over a three- or five-year period, is not a sound investment strategy. It is the definition of imprudence.
While courts reviewing fiduciary claims should require allegations of an improper fiduciary process, at the very least courts considering excessive fee and underperformance claims based solely on circumstantial evidence should insist that plaintiffs identify meaningful benchmarks in order to survive a motion to dismiss. As discussed above, although not nearly enough, that test provides at least some level of protection against frivolous claims based solely on hindsight comparisons of fees and performance. And, if not required, plaintiffs will be given a free pass to discovery for simply alleging that a plan fiduciary has selected an investment that did not perform as well as some other potential investment, no matter how dissimilar.
Key Point #6: Favorable guidance from DOL may help employers defend against frivolous claims, but much more is needed to protect fiduciaries.
As discussed above with respect to the Executive Order, favorable guidance from DOL on the use of alternative assets, including private equity, would be a very welcome development for plan sponsors who are interested in adopting innovative strategies that incorporate those asset classes. Favorable guidance would not only provide helpful clarity to employers on their fiduciary responsibilities, but it would also help employers defend against lawsuits attempting to use hindsight to second guess their decisions.
In the Intel opinion, for example, the Ninth Circuit ruled in favor of the employer, in part, by citing to DOL’s 2020 Information Letter addressing the use of private equity investments in DC plans. Specifically, in rejecting the plaintiffs’ generalized attacks on the use of hedge funds and private equity, the court quoted the portion of the 2020 Information Letter stating that “a fiduciary may properly select an asset allocation fund with a private equity component as a designated investment alternative for a participant directed individual account plan.” Certainly, fiduciaries facing litigation in the future would benefit from additional guidance like this, which supports fiduciaries making prudent selections within the range of reasonable judgments that are permissible under ERISA.
Realistically, however, and also as discussed above, even the most favorable guidance from DOL may not provide a sufficient shield against lawsuits for plan sponsors who incorporate alternative investments into their portfolios. Unfortunately, given the current state of litigation, this is even the case for plan sponsors that follow an informed, thorough, and prudent process. Unless Congress or the courts take meaningful actions to make it more difficult for plaintiffs to bring baseless ERISA suits, such as requiring allegations of an imprudent fiduciary process, attempts by plan sponsors to innovate – whether through the incorporation of alternative assets or otherwise – are likely to become yet another target for plaintiffs’ firms. This cannot be reconciled with the flexibility and discretion that ERISA is supposed to afford to fiduciaries, and meaningful reforms are needed.
[1] The White House also issued a Fact Sheet.
