Supreme Court Hears Intel 401(k) Private Funds Case

TL;DR: The Supreme Court heard Intel's 401(k) private funds case on October 6, and it doesn't change what you can hold in a 401(k) today. It changes how nervous your employer will be about putting private funds on the menu, and I think that matters just as much.

What happened at the Supreme Court?

The justices heard arguments on Tuesday, October 6, in Anderson v. Investment Policy Committee, according to AlphaMaven. The suit dates to 2019 and was filed by a former Intel employee. The plaintiff says the company's plan fiduciaries breached their duty by putting retirement money into hedge funds and private equity that underperformed.

Intel put hedge funds and private equity into its target-date funds after the 2008 crash. They lagged plain stock funds, and former employees sued, as Capital Wealth lays out.

What is the court actually deciding?

The court is deciding a pleading question, not an investment question. It is whether a plaintiff has to point to a "meaningful benchmark" before an underperformance claim can go forward. CNBC reports that the case is not challenging whether alternative assets like hedge funds and private equity can be used in a 401(k) alongside stocks and bonds.

I'd hold on to that point, because the headlines blur it. Nobody is asking the court to ban private funds from retirement plans.

Which way are the justices leaning?

Toward Intel. SCOTUSblog described a bench skeptical of claims that retirement-fund investment choices should form an easy basis for litigation in federal court. Its reading of the problem for the plaintiffs: the complaint did not include allegations about the performance of other funds using Intel-like strategies, and instead argued that hedge funds in general were imprudent. Courthouse News Service went further and wrote that the court seemed all but certain to rule against the Intel employees.

Justice Alito put it in football terms, as quoted by Courthouse News: "If you want to analyze whether it's a good strategy to try to convert a fourth down from the 1 yard line, you would have to look at a large number of instances where that's done," he said.

I read that as a QA instinct. One lagging private fund set against the S&P 500 is a single data point, and a fair comparison needs funds that did the same job.

Why should a private-markets investor care?

Because employers are waiting. According to CNBC, many plan sponsors are in limbo, awaiting the Supreme Court decision and finalized Labor Department rules before changing their 401(k) menu, even as the asset management industry gears up with new products.

ERISA attorney Elizabeth Hopkins told Aporia News: "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."

CNBC says a ruling for Intel could make some retirement plan sponsors more comfortable adding alternative investments to 401(k) plans, though the largest employers may still move slowly. A ruling is not out yet, so that is a read of oral argument and nothing more.

Open question	Where it stands
Can private funds sit in a 401(k)?	Not challenged in this case
Must plaintiffs name a comparable benchmark?	The question before the court
Labor Department rule on alternatives	Proposed in March, still being finalized

Your account won't change tomorrow. The ruling and the final Labor Department rule both have to land before most employers move.

What does a friendlier ruling not fix?

It would not fix fees, liquidity or your ability to judge what you own. On a submarine, nothing was signed off until someone other than the person who did the work checked it. A ruling that makes it harder to sue moves that checking job onto you, because the lawsuit stops being the backstop. I covered the regulatory side in how the 401(k) alternatives push opens private markets, and the liquidity problem in why evergreen funds can't keep their liquidity promise. Past performance does not predict what a fund does next, so read the downside before the pitch.

Is waiting on your employer the only route?

No. If your plan's menu stays as it is, a rollover into a self-directed IRA is the other way to hold private assets, and it puts the choosing and the checking on you. It comes with its own rules, prohibited transactions above all, so get a qualified tax professional involved before you move anything.

Common mistakes

Most readers I talk to assume this ruling decides whether private equity is allowed in their plan. It doesn't. Where people go wrong next is comparing a private fund to the S&P 500 and calling the gap proof of anything, which is the comparison the justices pushed back on. And projected returns are not results, so if you want the math behind those claims, start with how IRR is used to sell private equity.

FAQ

Does this case ban private equity in 401(k)s? No. CNBC reports the case does not challenge whether hedge funds and private equity can be used in a 401(k) alongside stocks and bonds. It asks what a worker must show to sue over underperformance.

Can I put private funds in my 401(k) today? Only if your plan's menu offers them. Your employer's committee decides that, and many are waiting on this ruling and the Labor Department rules.

Is there a way around waiting on my employer? A self-directed IRA, including a rollover from a former employer's plan, lets you choose your own holdings. It has rules, including prohibited transactions, so talk to a qualified tax professional first.

What to do this week

Pull up your plan's fund menu and look up the benchmark each option uses. Then write down what you would compare a private fund against if one showed up. If you want me to keep tracking this ruling and the Labor Department rule, subscribe to the free AIN briefing.

Educational content only. Not investment, tax, or legal advice. Not an offer or solicitation to buy or sell securities. Past performance does not guarantee future results. Private-market investments are illiquid and involve risk of loss, including total loss of capital. Consult qualified advisers. Angel Investors Network is not a broker-dealer or investment adviser.