Oracle Is Latest DC Plan Sponsor Targeted in Fee Suit

A new lawsuit filed by Schlichter, Bogard and Denton against Oracle Corporation for alleged mismanagement of the company’s 401(k) plan clearly echoes many of the complaints filed by the firm (and others) in the past several years.

Oracle Corporation is accused of breaching its Employee Retirement Income Security Act-based (ERISA) fiduciary duties in the management of its employees’ 401(k) plan assets.

Specifically, plaintiffs in Troudt vs. Oracle allege the Oracle Corporation 401(k) Savings and Investment Plan caused participants to pay recordkeeping and administrative fees to Fidelity that were “multiples of the market rate available for the same services.”

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

The text of the complaint suggests defendants “breached their fiduciary duties of loyalty and prudence and engaged in transactions expressly prohibited by ERISA … by failing to act solely in the interest of plan participants and failing to adequately monitor the investment options in, and service providers to, the plan.” Oracle is also accused of “preventing participants in the plan from discovering their breaches through a series of false and misleading communications to plan participants.”

Similar to related suits that have recently emerged, for example Bell v. Anthem or the new suits involving Empower and Reliance Trust Companythe plan sponsor here is accused of failing to leverage its tremendous bargaining power to “obtain high-quality investment management and administrative services at very low costs.” According to the plaintiffs, a plan the size of Oracle’s should not be lagging far behind its peer benchmarks on plan costs, fees, performance, etc.

Complaint documents suggest the Oracle plan held more than $12 billion in assets and had 65,732 participants as of 2015. According to the complaint, this makes the plan “one of the country’s largest 401(k) plans, in assets, larger than 99.99% of all 401(k) plans.”

Fidelity finds itself included in the complaint because, in accordance with 29 U.S.C. §1103(c), the plan document requires all plan assets to be held in trust by a trustee appointed by Oracle. “Oracle entered into a Trust Agreement with Fidelity Management Trust Company that was originally dated December 31, 1993, and most recently restated on February 1, 2003,” according to the complaint. “Fidelity Management Trust Company, Inc. provides recordkeeping and administrative services to the Plan as described in the 2003 Trust Agreement. Several Fidelity entities provide or have provided services to the Plan, including Management & Research Company, which is the investment adviser for Fidelity mutual funds.”

Because of the way the trust agreements are structured, Fidelity is described by the plaintiffs as “the sixth largest institutional holder of Oracle stock, owning over $2 billion shares. Thus, Fidelity has the influence of a large stockholder in light of its stock ownership.”

“Oracle has chosen and maintained funds from one of its largest shareholders, Fidelity, to be investment options in the Plan,” the complaint continues. “Oracle has also chosen Fidelity to provide recordkeeping services to the Plan. Because of these choices by Oracle, Fidelity has received, and continues to receive, millions of dollars of Plan participants’ retirement assets.”

In this respect the case has some similarities to Tussey vs. ABB, which was ultimately rejected for review by the Supreme Court last year. In that matter, the 8th U.S. Circuit Court of Appeals ultimately agreed with a district court finding that the ABB fiduciaries breached their duties to the plan by failing to diligently investigate Fidelity and monitor plan recordkeeping costs, but it agreed with Fidelity and ABB that the district court relied inappropriately on hindsight in its ruling that the switch from Vanguard Wellington funds to Fidelity Freedom funds violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA). Fidelity was also found not liable for breaches concerning its use of “float” income in that case.

The full text of the new complaint Troudt vs. Oracle is here

Report Reveals Stress Points in NYC Pension System

New York City’s Bureau of Asset Management has to improve its pension oversight, the report says.

So far, the $160 billion pension fund of New York City has avoided serious operational failures, according to an independent report commissioned by Scott Stringer, New York City comptroller.

The report applauds “heroic efforts” by staff, the extensive use of investment consultants, and the five city retirement systems and the comptroller for the continued operation. However, the report recommends a substantial revamping of the Bureau of Asset Management—and says the organization’s current investment strategy “presents a very high level of operational risk.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Through the bureau, the comptroller is in charge of the assets for five retirement systems in the city, as well as 11 related supplemental funds. The retirement systems are: two separate pension funds for the city’s police department and its fire department; two separate funds for New York City teachers and for the Board of Education retirement system; and the New York City Employees’ Retirement System.

These systems provide retirement security for more than 700,000 New Yorkers. According to Stringer’s report, the value of the systems’ investment portfolio has nearly doubled, to $162.9 billion in assets, since 2001. At the same time, the program to manage these assets has become more complex with the addition of new asset classes for diversification and expected risk-adjusted returns, sparking Stringer to conduct an outside assessment of the bureau and its processes.

Stringer’s system reform began in 2014, with the appointments of a chief investment officer, an internal auditor, a chief risk officer and a chief compliance officer for the bureau. Stringer has previously voiced his concern about retirement for New Yorkers and the behavior of financial advisers when giving investment advice.

Instead of 54 individual investment committee meetings a year among the five systems, Stringer and the retirement systems agreed in 2015 to hold a single Common Investment Meeting at a minimum of six times a year, scheduling additional meetings as necessary to process investment recommendations in a timely way.

NEXT: Gaps in staffing, policies, information infrastructure.

The current assessment, “Setting a Course for the Future,” a management and operations study conducted by Funston Advisory Services, continues Stringer’s initiative to bring the bureau up to date. As well as the analysis of the bureau, it surveys best practices for the city’s asset management.

Funston found gaps in staffing, organization, policies, procedures and information infrastructure, given the size and complexity of the city’s current portfolio. To close these gaps, Funston made a number of recommendations, including in-house finance, budgeting, HR and IT planning capabilities; staff training; and modernizing policies, procedures and information systems. The report also noted “key person dependency”— institutional knowledge resides in a few key people who are increasingly eligible for retirement— and a lack of formal succession planning.

Other recommendations: The operations of the bureau should be restructured to raise it to the standard of its peer pension systems. For example, in 2014, staff who invested cash holdings and those that administered the movement of cash reported to the same individual, an inherent conflict. Oversight of the cash management group was subsequently moved to the Bureau of Accountancy. The report recommends restructuring operations areas to improve timeliness and reliability of reporting, eliminate repetitive clerical tasks, enhance external vendor oversight, and improve the quality and quantity of data available by the bureau staff for analysis.

The bureau needs to formalize its risk and compliance assessments in regular reports using documented policies. At the start of 2014, the bureau had no formal risk management department, but depended on consultants for most portfolio-level risk analysis.

The bureau’s organizational structure hits bottlenecks in decision-making because it is too dependent on senior management and limits the ability to respond quickly. Most actions require formal approval of the chief investment officer or the assistant comptroller, or both. The report recommends adding one or more deputy CIOs and the formation of an internal investment committee to review investments, along with other operational changes.

NEXT: Recommendations for investment risk management, performance benchmarks.

Funston examined the bureau’s investment management systems and recommended several changes to improve investment risk management. Working with the investment strategy asset class heads, risk management should identify appropriate quantitative tools for each asset class. The quantitative tools should be robust enough to assess total fund risk and perform performance and risk attribution. Set due diligence and monitoring strategies that are coordinated between the compliance and investment strategy units.

The bureau should review its performance benchmarks, especially those that are tailored specifically to the bureau, and which have not been changed in decades—such as fixed income. Also to be scrutinized are those that contain hurdles or are expressed as absolute returns—real estate, private equity, opportunistic fixed income, infrastructure—to judge whether they are reasonable in the current market environment.

The report recommends that the bureau urge each of the five retirement systems to adopt a total fund benchmark designed to reflect progress against offsetting pension liabilities. That would be in addition to the current benchmarks, which are designed to measure relative performance.

The current assessment, “Setting a Course for the Future,” a management and operations study with best practice review for the city’s asset management, continues Stringer’s initiative to bring the bureau up to date. The report was conducted by Funston Advisory Services, which provides of governance, operations and risk intelligence research and support to public retirement systems. A link to the report is on the comptroller’s website.

«


You have read one
"Here's My Story"
essay for free.
After your third essay,
subscribe to The G&LR
(either print or digital edition)
for unlimited access
to all articles on our website
going back to 2003.