Compliance June 4, 2014

DOL Resolves Valuation Issues with ESOP Transaction

June 4, 2014 (PLANSPONSOR.com) – 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).
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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.

Administration June 4, 2014

Funded Status of Corporate DB Plans Decline

June 4, 2014 (PLANSPONSOR.com) – The funded status of corporate defined benefit (DB) pension plans decreased in May, says a recent BNY Mellon analysis.
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The BNY Mellon Investment Strategy & Solutions Group (ISSG) finds that the funded status of the typical U.S. corporate pension plan fell 0.4 percentage points in May to 90.6%, a new low for 2014, as liabilities increased faster than assets for the third consecutive month.

“Returns for corporate defined benefit portfolios were nearly 6% through May, which is near their annual targets of 7.5% to 8.0%,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG, based in New York. “While asset returns have been good, they have been offset by declining interest rates, resulting in higher liabilities and lower funded status.”

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BNY Mellon’s Institutional Scorecard for May noted liabilities increased 2.3%, outpacing the 1.9% increase in assets at the typical corporate plan during the month. In addition, the funded status of corporate plans, year to date, is down 4.6 percentage points.

Public DB plans, endowments and foundations benefited from strong asset returns and exceeded their return targets, says ISSG.

“Reflecting lackluster U.S. economic growth, interest rates continued their downward slide,” says Wozniak. “Many plan sponsors continue to maintain their equities allocations as they wait for the funded status of corporate plans to increase. Should the funded status rise, we would expect to see more plans reduce their exposure to market risk.”

The increase in liabilities for corporate plans in May was due to a 14-basis-point decline in the Aa corporate discount rate to 4.28%, according to ISSG analysis. Plan liabilities are calculated using the yields of long-term investment grade bonds, with lower yields on these bonds resulting in higher liabilities.

The analysis notes that on the public side, DB plans in May exceeded their target by 1% as assets led by real estate investment trusts (REITs) and emerging markets equities increased. Year over year, public plans exceeded their target by 5%.

For endowments and foundations, the real return in May was 0.5%, according to the ISSG analysis, exceeding the target for spending plus inflation. This was driven largely by their exposure to REITs and U.S. equities, which account for 25% of the typical portfolios for endowments and foundations. The analysis finds that, year over year, foundations and endowments are ahead of their target by 4.5%.

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