We all know that we should not compare apples to oranges and hope to draw meaningful conclusions. So to it is in the 401k world. When comparing investments against each other, make sure they are in the same category (ie, US Large Blend vs US Large Blend).
You can further make sure the comparison is a good fit by looking at the underlying investments. Using International Large Blend as an example, do the two investments have equal or similar allocations to different countries or regions of the world? If you are wanting to draw an inference between two or more investments, the comparison should be valid.
Against that backdrop, the Supreme Court has agreed to hear arguments in the case of Anderson v. Intel. This case was filed way back in 2019. The wheels of justice certainly do turn slowly, no? At issue is whether plaintiffs must identify a meaningful benchmark or investment with similar objectives to plausibly allege breach of fiduciary duty.
This makes sense in that if the plaintiffs want to allege damages (ie, underperformance or high fees), they need to show how they were harmed. In the 401k world, this can be done by making a proper comparison.
1. Background of the case.
Plaintiffs allege Intel plan fiduciaries imprudently invested billions in illiquid, opaque, high-cost hedge fund strategies that underperformed. The Ninth Circuit held plaintiffs failed to show breach partly because they didn’t set out a meaningful benchmark against which to measure performance. Intel defended its custom benchmarks tied to asset allocation and stated objectives.
2. Why this matters.
The Supreme Court’s decision could clarify how fiduciary litigation evaluates performance of alternatives and other non-traditional strategies. If the Court rejects a rigid meaningful benchmark requirement at the pleading stage, plaintiffs may find it easier to bring ERISA claims based on alleged imprudence of alternative investments. Conversely, affirming a benchmark requirement could raise the bar for such suits.
Benchmarks for Alternative Investment Categories — Practical Guidance
For sponsors considering alternatives in a 401(k) lineup, benchmark selection is both a fiduciary design and litigation risk issue. Alternatives often lack broad, liquid peer universes, so benchmarks must be defensible, transparent, and aligned with investment objectives. Below are few ideas that could work in practice:
1. Infrastructure / Private Equity
- Appropriate Benchmarks:
- Cambridge Associates U.S. Private Equity Index (vintage-year matched)
- Burgiss All-Private Equity Benchmark (customized by strategy and vintage)
- Rationale: Alternatives in private markets are long-duration, illiquid, and dependent on cash-flow timing; vintage-matched return indices are standard in due diligence.
2. Private Credit / Direct Lending
- Appropriate Benchmarks:
- Cliffwater Direct Lending Index
- S&P/LSTA Leveraged Loan Index (where risk profiles align)
- Rationale: Matches risk characteristics more closely than broad fixed-income benchmarks; accounts for credit spread and income focus.
3. Real Estate / Real Assets
- Appropriate Benchmarks:
- NCREIF Property Index (NPI) for core real estate
- FTSE EPRA/NAREIT for listed property comparisons
- Rationale: Captures real estate return drivers (income + appreciation) more accurately than stock/bond indexes.
4. Hedge Fund-Like Strategies
- Appropriate Benchmarks:
- HFRI Fund of Funds Composite Index
- Barclays Hedge Fund Index
- Rationale: These multi-strategy benchmarks better reflect diversified hedge fund exposures than traditional equities or fixed income.
5. Customized Blends
If using bespoke or overlay strategies (e.g., liability-aware or glide path-adjusted vehicles), document the construction:
- Define objectives and risk profile
- Use blended indices that reflect target exposures (e.g., a mix of public equity, credit, and hedge indices)
- Ensure transparency so participants and regulators can interpret the benchmark
As always, don’t take my word for this. Discuss it in your Investment Committee.
Practical Fiduciary Takeaways
A. Documentation is essential.
For any alternative option, clearly document why the selected benchmark matches the strategy’s risk/return objectives and liquidity profile.
B. Benchmarks should be industry-recognized where possible.
Regulators and courts tend to view recognized third-party benchmarks as more credible than proprietary composites that lack transparent construction. I still laugh when I see the comparison benchmark is stated as a “custom-spliced index”.
C. Performance vs. benchmark comparisons help satisfy prudent process.
Consistent underperformance relative to a relevant benchmark over multiple measurement periods (e.g., 3-, 5-year trailing) can raise imprudence concerns — as seen in other litigation alleging fiduciary breaches.
D. Beware litigation risk where benchmarks are unclear.
The Intel case centers on whether plaintiffs must identify “meaningful” benchmarks. Sponsors should mitigate risk by selecting and documenting benchmarks that clearly reflect the investment’s objectives.
The Parting Glass
From a fiduciary standpoint, benchmarks matter not just for performance evaluation but for legal defensibility. Sponsors that adopt alternatives without clear, objective comparators exposure themselves unnecessarily to disputes over prudence evaluation. Document how you arrived at the benchmarks that you did. Show how your decision making is defendable, repeatable, and prudent.