Products May 18, 2015

DCIIA Paper Outlines DC Plan Success Factors

The Defined Contribution Institutional Investment Association believes retirement income adequacy should be the primary objective of most DC plans today.
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The Defined Contribution Institutional Investment Association (DCIIA) has developed a best practices framework to outline actions that defined contribution (DC) plan sponsors and fiduciaries can take to build plans that have the greatest potential to help participants achieve retirement readiness.

In “Defined Contribution Plan Success Factors: Framework for Plans with an Objective of Retirement Income Adequacy,” the DCIIA addresses specific factors related to plan design, investment structure, and plan monitoring. It can help plan sponsors and fiduciaries: 

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  • Evaluate existing plans;
  • Develop thoughtfully designed plans;
  • Maximize the effectiveness of auto features programs; and
  • Identify and address less-than-optimal plan participant behaviors.

The association notes that the framework is intended to provide ideas for plan sponsors and fiduciaries to consider; it is not expected that every recommendation will apply to every plan. Plan sponsors and fiduciaries should design a plan and implement the practices that make the most sense for their participants.

“The decisions that plan sponsors and fiduciaries make today will impact the retirement readiness of future generations of retirees,” DCIIA says.

The white paper is here.

Compliance May 18, 2015

Investment Manager Allowed to Sue over Oral Agreement

A California state appellate court found allegations supported an investment manager’s claim that it had entered into an oral agreement with CalPERS.
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Centinela Capital Partners sufficiently alleged that it had an oral agreement with the California Public Employees’ Retirement System (CalPERS) to manage a $100 million investment into the Capital Link III fund, according to the Court of Appeal for the State of California.

The court found Centinela set forth 13 of the material terms of that promise and alleged that the management of the Capital Link III fund is to be governed by the same terms and conditions set forth in the very detailed written contracts applicable to the Capital Link I and Capital Link II funds, which Centinela already managed for CalPERS. “Centinela’s incorporation of the prior written contracts, coupled with its allegation that their terms will apply with equal force to the Capital Link III agreement, provides a basis for evaluating a breach of contract and for fixing damages,” the court said.

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According to the court opinion, in 2006 and 2008, respectively, CalPERS hired Centinela to manage two of its $500 million portfolios—the Capital Link I and Capital Link II funds. Each of these funds was created by a detailed written contract. In 2009, Centinela and CalPERS started discussing the possibility that Centinela might manage a third, $100 million portfolio to be called Capital Link III.

On May 16, 2011, Centinela and CalPERS orally agreed that CalPERS would bypass any competitive bidding process and award Centinela the management of the Capital Link III fund, and another, unspecified larger portfolio in the future. The parties further agreed that CalPERS’s performance was contingent upon Centinela severing its ties with Cesar Baez, one of its three principals, who had some association with persons being investigated by the Attorney General for peddling influence with CalPERS.

In reliance on this oral agreement, Centinela severed its ties with Baez. Then, Centinela learned that CalPERS would not carry through with its oral promise to have Centinela manage the Capital Link III fund. Centinela sued CalPERS for not honoring the alleged oral promise to award Centinela a contract to manage a $100 million investment portfolio for CalPERS.

A lower court found the alleged oral contract was “an agreement to agree” and “lacked specificity.” The appellate court reversed and remanded that decision to the lower court.

A client alert from law firm Reed Smith says the case “provides an important warning to plan fiduciaries and their investment staff: Be careful what you say when discussing investment opportunities with managers, especially those incumbents with whom you already have a contractual relationship. Make it clear in your communications—whether by phone, in person, by email or letter—that nothing will be binding on your plan unless and until a complete set of documents has been approved and inked by both sides.”

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