1. Thinking Outside the Box: Is It Dangerous for You and Your Plan? Discussion Leader: Marcia S. Wagner The Wagner Law Group Defined Contribution Summit November 17, 2015

2. Introduction Intel Corp. ERISA Lawsuit Proposed class action lawsuit relating to Intel’s 401(k) plan and profit-sharing plan Filed on Oct. 29, 2015 against Intel’s plan committee and Intel’s board of directors Claims Against Intel Plan Fiduciaries Claims are unlike those in 401(k) fee litigation lawsuits Intel plans offered model portfolios with a target date strategy and a balanced strategy As alleged, alternative investment allocations in these portfolios were too high and determined imprudently 2

3. Legal Claims in Intel Complaint Model Portfolios in Intel DC Plans Model portfolios (target date and balanced) included heavy allocations to hedge fund and private equity options Claims and Allegations Heavy allocation to alternative investments resulted in underperformance and excessive fees for model portfolios Morningstar Category used as performance benchmark Index-based target date mutual fund is fee benchmark Also alleges that participants did not receive sufficient disclosures for alternative investment options 3

4. Factual Background for Intel DC Plans Intel’s 401(k) Plan Features automatic enrollment, using target date portfolio as default investment 40% of plan participants are exclusively invested in target date portfolio Intel’s Profit Sharing Plan Features employer-paid contributions (and plan is closed to new employees) Balanced portfolio is primary investment vehicle 90% of plan participants are invested in balanced portfolio 4

5. Factual Allegations Fiduciary Committee for Intel DC Plans Steadily increased allocation to alternative investments for target date and balanced portfolios (beginning in 2009) Intel’s Target Date Portfolio Alternative investment allocation exceeds 20% (2011) Causes strategy to underperform by 400 bps in 2013 (in comparison to Morningstar Category for TDFs) Also causes fee to increase from 70 bps to 130 bps (which is 8 times the fee for Fidelity’s index-based TDF) In 2015, fiduciary committee hires Alliance Bernstein, a TDF manager known to favor alternative investments 5

6. Investment Duties Under ERISA Duty of Prudence Procedural prudence requires plan fiduciary to perform due diligence and gather all relevant information Substantive prudence requires plan fiduciary to have necessary expertise or consult investment experts “Appropriate Consideration” Must Be Given Role of proposed investment in portfolio Risk of loss and opportunity for gain, and portfolio diversification Liquidity and cash flow needs Modern Portfolio Theory 6

7. Other Related Duties Under ERISA Duty to Diversify Diversify investments so as to minimize risk of large losses Fee-Related Duties Investment fees must be reasonable in light of qualifications of provider and quality of investment services No duty to choose cheapest investments Participant Disclosures Must provide sufficient information on plan investment options Detailed requirements under DOL’s 404a-5 Regulations Additional requirements for QDIA (Qualified Default Investment Alternative for plans with auto enrollment) 7

8. Legal Standard for Alternative Investments Context of DB Plans Institutional pension plans (and endowments) routinely include significant allocations to alternative investments Can enhance portfolio diversification (Duty to Diversify) Plan fiduciaries must determine strategic allocations with procedural and substantive prudence (Duty of Prudence) Must give “appropriate consideration” to cost and compare to similar alternative investments (Fee-Related Duties) 8

9. Alternative Investments in DC Plans Legal Standard Under ERISA Plan fiduciary is responsible for plan menu options, and participants are responsible for investment allocations Duty of Prudence applies to plan fiduciary’s selection of menu options Duty to Diversify requires broad range of menu options Fee-Related Duties require reasonable investment fees No prohibition against alternative investment options Intel Case No problem with alternative investment options in menu Complaint focuses on target date and balance portfolios (and not investment menu) 9

10. Alternative Investments in Model Portfolios Fiduciary Responsibilities for Model Portfolio DC plan fiduciary must determine underlying investments and strategic asset allocations for model portfolio Similar to DB plan fiduciary’s portfolio responsibilities Therefore, alternative investments are permissible (?) New Legal Theory in Intel Lawsuit DC plan fiduciaries “must focus always on the most vulnerable participant” and “protect average employee” Alternative investments are for sophisticated investors But no existing legal authority expressly bans alternative investments in DC plans in order to protect participants 10

11. Critical Questions of Fact Did Fiduciary Breach Occur? Plaintiff has raised new legal theory (which would ban all alternative investments in model portfolios for DC plans) Can also pursue claims based on existing fiduciary duties Did Fiduciaries Follow Proper Practices? Written strategic allocation guidelines (Procedural Prudence) Regular fiduciary meetings and reviews (Procedural Prudence) Consulting with investment expert (Substantive Prudence) Investment analytics and reports (Diversification) Fee benchmarking analysis (Fee-Related Duties) 404a-5 Disclosures and QDIA Notice (Participant Disclosures) 11

12. Policy Questions for DC Plans Alternative Investments in DC Plan Menu? Duty to Diversify argues in favor of allowing alternative investment options, but there are paternalistic concerns Paternalism ultimately requires switch from participant- directed to fiduciary-directed investments for participants Alternative Investments in Target Date and Other Risk-Based Investment Solutions? May improve retirement outcomes for participants Since DB plans are allowed to invest in alternative asset classes, shouldn’t DC plans have same flexibility? Robust disclosures would be beneficial for participants 12

13. Fiduciary Risks Approving Use of Alternative Investments Intel lawsuit highlights potential risk of using alternative investments in target date or balanced investments Not Approving Use of Alternative Investments Alternative asset classes are becoming more widely utilized in target date investment solutions Plan fiduciaries should at least consider whether their use would be beneficial for participants Potential liability for plan fiduciaries that fail to act prudently 13

14. Performance Periods Intel Complaint Focuses on performance of target date portfolio from 2011 to 2015 Asserts that target date portfolio underperformed by 400 bps in 2013 Theoretical Evaluation Period Should measure target date portfolio’s performance over full market cycle (including bull and bear periods) Court may not favor focusing on performance in a single year (2013) 14

15. IMPORTANT INFORMATION This presentation is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or any of the other presenters. Plan sponsors and financial professionals should consult with their own legal counsel to understand the potential impact of the Employee Retirement Income Security Act of 1974, as amended (ERISA), on their particular situation, as well as the nature and scope of their responsibilities under ERISA and other applicable law 15