In this episode of the Broadcast Retirement Network, we sit down with Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group and author of “Kentucky Fried Pensions,” to unpack the Intel Supreme Court case and what it means for everyday retirement savers.

Transcript:

Jeffrey Snyder, Broadcast Retirement Network

We’re gonna welcome back to the program, Chris Tobe of the Hackett Group. Chris, it’s always great to see you.

Thanks for joining us in the program again this morning.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Great, I always enjoy it, Jeff, and I enjoy your daily newsletter every morning as well.

Jeffrey Snyder, Broadcast Retirement Network

And thank you for being a long-term subscriber and for your willingness to come on. Chris, I always like talking about, I like different perspectives. I think that what this show is about, candidly, and if I were to give my opinion, is about bringing all perspectives so that people have the most information they can to make the best decision possible.

So what I like about your perspective in particular is that you have served on many boards. You’ve written books about being on those boards, and you’ve also looked at a lot of the legal cases around retirement plan litigation. So with that context in mind, I had reached out to you because I wanna talk about the Intel case that’s currently in front of the Supreme Court.

Give us the lay of the land here because we’ve talked to you about fees. This isn’t necessarily about fees. It’s about something else.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Well, again, that’s the issue. I think it really should be about fees and is, but it’s being pushed to be kind of this generic performance type of issue, which I think is used to cover up excessive fees. So that’s part of my whole issue here.

And I don’t like the way the defense attorneys or the plaintiff attorneys are kind of handling this case and talking about it. The thing about a meaningful benchmark, when you have things like target date funds, and this is what Intel has done is they have a lot of future mega plans like Intel and GM, they’ll have what we call master trust where they’ll have this, it’s kind of like the target date fund we see everywhere else where they put stocks, bonds, private equity, hedge, all their different asset classes in one kind of master trust. And they use it for both their defined benefit plans and their defined contribution plans. So the Intel has, I think it’s a private acreage hedge fund buried inside this master trust.

And again, performance, to me, it’s all about transparency here, being able to see down to the asset class level. So remember right now in 401k plans, over 50% of the assets are now in what we call target date or kind of asset allocation structures. But what we don’t, so with all those assets, and each of those have four or five different asset classes or maybe more underneath them.

And the whole problem to me is that the industry has used these target date funds actually to be able to block the transparency of the underlying funds. So that you see a target date fund and you don’t know what its allocation is. You don’t know what the fees are underneath individually.

Sometimes you’ll have an aggregate. So by reporting everything in aggregate, I think we leave out all the transparency. And this is what I think Intel’s more about than the actual performance around meaningful benchmarks, which is a term that has no, to me, I’ve never heard investments before.

I think it’s made up by Wall Street attorneys to block transparency, this whole term of meaningful benchmark. Because I was taught, okay, I’m sorry, go ahead.

Jeffrey Snyder, Broadcast Retirement Network

Finish your thought that I have a follow-up to that because I wanna get into your role as a professional. So finish your thought and then I’ll come back to you with a question.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

So how do you benchmark something? First of all, the classic benchmark would be the S&P 500 index versus a large cap stock fund. And in that type of benchmark, we know what the benchmark is.

We know what the underlying securities are in both of what we’re investing in and what the index is. But for a contract like a private equity, private credit, or even annuity, there’s no underlying securities to measure. It’s just a contract.

And first of all, I have a very hard time benchmarking any contracts. And then you have a target date that has three contracts and three funds in it, mixing and matching them creates very difficult, lots of difficulty in benchmarking. So yeah, go ahead.

Jeffrey Snyder, Broadcast Retirement Network

Okay, so my follow-up is, let’s talk about your role as a fiduciary. Because one of the things you do in addition to serving as a witness for the plaintiff, right? So why is this transparency important for the work you do as a fiduciary?

As someone who is advising the plan sponsor who owns the plan, runs the plan, has a responsibility to pay out benefits from the plan. What does that mean to you as that individual?

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

If I don’t have transparency down to the fund level in a target date fund, how can I have any fiduciary control over the underlying assets? If I’m not allowed to know the fees, I don’t know how they’re computing performance, that to me as a fiduciary, it’s a black hole. And black holes create liability for me as a fiduciary, the plan and everyone else, when there’s not transparency all the way down to the asset class level in these types of funds.

Jeffrey Snyder, Broadcast Retirement Network

So I wanna play devil’s advocate. Well, maybe not advocate, but the accountancy of that would be, there’s a fun fact sheet. But let’s talk about the fun fact sheet that, so every targeted fund, every fund in a retirement plan, has this fun fact sheet.

It’s meant to distill what is arguably a very complex product into something that is meaningful to the end user. So is that enough for the participant or for you to look at? So that one or two pager, that’s a PDF that’s available for download.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Well, for participants, it’s hard to get them to read more than one page anyhow, and it’s maybe not fair to have them do that. But what I’m looking for, and I’m actually maybe pushing legislation around this, is that on the 5500 form, which everyone can have access to, a fiduciary should be looking at, the plan should be looking at, and a participant, if they want to, can go to the 5500 form, then there should be more disclosures and transparencies there. The fun fact sheet, it’s just gonna be very difficult to get that level of transparency there without making it too complicated and something that a participant wouldn’t read anyhow.

Jeffrey Snyder, Broadcast Retirement Network

So let’s go back to the Intel case. So this has been going on, this has wound its way through the court system. Again, you and I are not attorneys, although you have acted as a witness in several litigation cases.

So you have more experience than I am. So where does this wind up? Because the end of the Supreme Court term is in June, right?

So they had to write, they’ve been taking, having hearings from both sides. I won’t pretend to have listened to those conversations. It’s a little too nuanced for me.

But where does this wind its way through, come June of 27, or does it, do we get some kind of decision in 27?

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

I think whatever decision we get is probably gonna be murky. Because it’s all about these kind of, these lawyers like to talk about all this procedural things. And it’s all about can, when you file a case, will there be discovery, all about issues of level of transparency that the plaintiffs can ask for.

And it’s just gonna be positioning around all those type of issues around whether you can file a case, do you have enough to file and get past the motion to dismiss? So a lot of it, again, revolves around those issues. And I think at the end of this, it may be kind of a, the Supreme Court will say, well, yeah, you need to have some, it’ll be a mixed opinion that may not tell us anything and that we’ll still be in limbo.

And that’s why I think we need some better disclosure legislation out there to really fix this. I don’t think the Supreme Court, they’re kind of, the way they’re looking at and talking about meaningful benchmarks and things like that, the Supreme Court just doesn’t have the ability to look down in the detail level. I mean, it would take them 20 years to get inside these things.

It’s just, they have to rule on kind of some, the more superficial legal questions around discovery and things like that. But I don’t think it will really solve it either way come June, whatever their decision is, because I don’t know what kind of decision they could make. They can’t just say, oh, private equity is great.

And you have no discretion. They’re still gonna hold up ERISA, but how they do it and what’s the threshold for litigation is really what this is going to set. And it could be higher or lower threshold for litigation, but your largest plans will still, and again, I think the plaintiff attorneys are guilty of this.

They tend to go after the mega plans, the top couple hundred of them for about anything.

Jeffrey Snyder, Broadcast Retirement Network

Yeah, well, that’s where the candidly, that’s where the money is, right? If you’re a lawyer and you’re looking to get paid, those small plans don’t probably pay us.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Well, I still think the medium sized plans, a hundred million to a billion, those plans still are good. Good, and that’s where I think more of the solid cases are anyhow. But the mega plans, they’re also easier to find plaintiffs.

It’s hard to find, you have to find plaintiffs because most plaintiffs, no one understands these plans, especially the plaintiffs. So getting plaintiffs is also a challenge for those attorneys as well. So that’s kind of where I’m going.

Jeffrey Snyder, Broadcast Retirement Network

Well, let me ask you about, so when we had you on, I don’t know, a couple of months ago, we talked about these new Department of Labor rules. I haven’t seen the final version of it. I’ve seen the, I guess the proposed and then they got the comments, et cetera.

We talked to you during the comment period or after the comment period. So when do these, does this have an impact on those rules and do you have a sense for when those rules might be released? I mean, that you would think they would have been, how long to take to finalize rules?

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

I don’t know. A lot of these rules are not real hard and fast things. There’s kind of loose gotten.

You said, you can have private equity, but you still have to do your due diligence and do all the types of things that ERISA requires. And I think what it may do is it may embolden the industry, especially to put a lot of private equity things in small plans, but the larger plans will still stay away because there’s litigation risk. So you’ve got like two parts of the market here.

It probably may not be enough though that large plans will invest, but small plans, especially under a hundred million who have really no risk of litigation, it’ll start growing in those areas with the DOL guys. But then when we get to change parties and go to another DOL, it could flip around in that direction as well.

Jeffrey Snyder, Broadcast Retirement Network

And so to that point, and I don’t want to get, we don’t do politics on the show, but if there is a switch in the executive branch or in the Congress, could whatever is written be done? So for example, ESG, that was a big proponent or a big initiative, environmental social governance funds were a big initiative in the last administration. That appears to have been in some ways unwound.

So could what we’re talking about today be, even if the Supreme Court rules and we have these new regs, couldn’t that be undone?

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Well, kind of, I mean, it can be a shifting back and forth. The ES, I think ESG is mostly a bunch of noise in my opinion. And again, some ESG funds charge too high fees.

And I don’t like, I don’t think, I think even violate the governance part of themselves because they charge higher fees with these ESG funds. So there’s a lot of hypocrisy in every side. And when you get ESG kind of try to throw politics in here and it tends to be messy on both sides, going back and forth.

And I really don’t think from a material point of view, it makes that much difference. And the private equity will probably start out small as well inside of target date funds. And as we go along here, these are not gonna be monster issues right away.

They’re just gonna kind of gradually kind of move over time.

Jeffrey Snyder, Broadcast Retirement Network

Yeah, it’s gonna be interesting to see. You know, like I said, I just kind of follow it from the outside looking in. It’ll be interesting to see what you’re talking about, but also what materially it means to the end user, to the participant.

Is it going to increase the return? Is it going, now, you know, everyone always says, oh yeah, well, if you add this sliver, it’s gonna do X, Y, Z, create greater diversification, a greater return. I think time will tell as to whether or not that makes sense.

And it’ll be a, you know, it’ll give people, plant sponsors the reason to say, hey, should we keep our plan plain vanilla? Anyway, TBD, Chris, it’s always great to see you. Thanks for popping by the program, sharing your expertise.

And we look forward to having you back on the program again very soon, sir.

Chris Tobe, CFA, CAIA, Chief Investment Officer at The Hackett Group

Great, Jeff. Thanks for having me.