DOL Resolves Valuation Issues with ESOP Transaction

The Department of Labor (DOL) reached a $5.25 million settlement with GreatBanc Trust Co., resolving allegations the Lisle, Illinois-based company violated the Employee Retirement Income Security Act (ERISA).

In 2006, GreatBanc, as trustee to the Sierra Aluminum Co. Employee Stock Ownership Plan (ESOP), allegedly allowed the plan to purchase stock from Sierra Aluminum’s co-founders and top executives for more than fair market value.

GreatBanc and its insurers will make $4,772,727.27 in payments to the ESOP and pay $477,272.73 in civil penalties. The company will also put safeguards in place whenever the company is a trustee or fiduciary to an ESOP that is engaging in transactions involving the purchase or sale of employer securities that are not publicly traded.

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These safeguards include requirements for: the selection of a valuation adviser and the oversight of the adviser; the analysis required as part of the fiduciary review process; and the required documentation of the valuation analysis.

The settlement resolves a 2012 lawsuit, filed by the DOL, that alleged GreatBanc failed to adequately inquire into an appraisal that presented unrealistic and aggressively optimistic projections of Sierra Aluminum’s future earnings and profitability. GreatBanc allegedly failed to investigate the credibility of the assumptions, factual bases and adjustments to financial statements that went into the appraisal. The suit also alleged that GreatBanc asked for a revised valuation opinion in order to reconcile the ESOP’s higher purchase price with the lower fair market value of the company stock.

Sierra Aluminum is based in Riverside, California. The company produces extruded aluminum products for use in various industries, such as construction and transportation. The ESOP had 385 participants as of the end of December 2012, according to the DOL.

PSNC 2014: Investment Diversification

Amid the discussion of industry best practices at the 2014 PLANSPONSOR National Conference, the question of the retirement plan investment menu and how it has or should evolve came up continuously.

Industry experts and attending sponsors alike questioned whether a lineup of traditional mutual funds should still make up the core retirement plan menu, and whether alternatives should be added. Others asked about the ideal number of funds to include on a plan menu, and whether prepackaged investment solutions make sense for all employees.

According to Tim McCabe, national sales manager and senior vice president of Stadion Money Management, “The pendulum has swung the other direction from just 10 years ago. There has been a huge reduction of the plan menu.”

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And as investment menus have shrunk, many more packaged products have hit the market, McCabe adds. Fifty percent of retirement assets are currently in packaged products, he said, and that could grow to 80% going forward.

“The majority of participants should be in a professionally managed solution,” concurred Josh Cohen, managing director of defined contribution for Russell Investments. “It doesn’t matter if they are all PHD’s or factory workers, they should still be using a target-date type product.

“There is no magic number that makes for a more manageable fund menu. It depends on what you want to put in participants hands, although six to eight funds that are different from each other is a good number to start with,” Cohen said.

“For the participant who chases performance, we think adding alternatives in a packaged format that includes, for instance, real assets, income alternatives and alpha alternatives can work well,” said Laura Lawson, senior client portfolio manager in the OppenheimerFunds Global Multi Asset Group. “This is generally what is appropriate for the DC market, but how you put it together is important.”

McCabe said that Stadion Money Management uses exchange-traded funds (ETFs) for a similar purpose.

“For instance, in a 2050 target-date fund, we would use 50% equity and 10% bond, plus a tactical sleeve made up of all ETFs, giving the manager the ability to be opportunist on behalf of the participant,” McCabe said. “We might use gold, timber, commodities, all packaged inside a professionally managed account. This also leaves us 40% of the fund to smooth out returns over market volatility.”

Cohen added that breaking away from name brand fund recognition is a good goal. “In the end a brand name fund doesn’t help a participant. It’s difficult to make a change in funds when participants are attached to a name. It’s better to change to a more generic fund so able to make changes with confidence.”

“The good news about breaking such an attachment is that companies are offering 3(38) fiduciaries to help you make those decisions,” McCabe added.

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