“We push the boundaries”.
This is how Intel Corporation, the respected Silicon Valley IT giant, describes its role as an innovator and value maker for shareholders, customers, and society.
But pushing the boundaries into another area – overseeing its $ 14.6 billion employee retirement plans – is bringing Intel unwanted. Betting on hedge funds and private equity in those plans brought a complaint late last month from a former employee Christopher M. Sulyma. He argues that these investments have increased the risks and costs of retirement portfolios, hurting participants in the plan.
The lawsuit against Intel and board members overseeing the plan’s operation and investments is the latest in an increasingly successful lineup against companies offering 401 (k) plans to their workers. These cases have argued that retirement plans were managed in a way that did not meet the trustee requirements.
While any lawsuit against a 401 (k) sponsor spends, most involve high fees and often hidden in the participants.
The case against Intel has a different twist. At its core is this question: if hedge funds, private equity portfolios and commodities were to be close to a 401 (k) plan?
For professionals who run public pensions, these types of investments are ubiquitous. They are much less common in plan 401 (k), which address individual employees and generally limit investment choices to mutual funds holding shares and quoted shares on the stock exchange.
An Intel spokesman refused to comment on the controversy. But the company’s approach to its retirement plan as established in the case was certainly atypical.
For example, instead of hiring an outsourcing company to create a plan consisting of low-cost investment funds, the nine Intel portfolio portfolios were developed by the company’s investment committee. This committee, which included an Intel director and the treasurer of the company, chose specific vehicles, which include mutual funds, hedge funds and maturity partnerships, used to achieve the objectives of plan participants and certain asset allocations.
Earlier this year, Intel changed its operations by handing over the retirement plan to AllianceBernstein. The heavy dependence on alternative investments seems to have continued.
The company has two main defined contribution pension vehicles, Intel Retirement Plan and Intel 401 (k) Savings Plan.
The case claims that two groups of Intel employees paid more costs and lost hundreds of millions of incomes they would otherwise have received by investing in simple vanilla funds.
One group has invested in some target-date Intel funds. The other has focused on the Intel Diversified Global, the asset allocation model that has directed money to various vehicles and has included an unusual hedge fund cluster and other alternatives. Intel has made public inadequate information on these tools, affirms the case, leaving the participants unable to make a conscious decision “whether investment in these hedge funds and private funds has been prudent.”
Unlike many 401 (k) plans that allow employees to choose their investment, the Intel plan has often made these decisions for them. For example, until 2015, the cause claimed that Intel employees in the Retirement Plan that were under 50 were automatically included in the Global Diversified Fund.
As a result, the fund was the only investment available for “the overwhelming majority of participants” in the Intel retirement plan, the cause said. By 2013, almost 37% of the Global Diversified Fund allocation was in hedge, private equity and commodities.
In addition, participants in the 401 (k) savings plan that did not make a selection were automatically enrolled in a target-date fund that matched their age, the cause said. Many of these funds have also been heavily invested in alternatives.
In 2005, Intel employees were in a vanilla plant, investing primarily in large capitalization shares in Standard & Poor’s 500. Then the company began diversifying into small capitalization securities, emerging market securities, fixed income investments, and Alternative Investments Futures of commodities, hedge funds and private equity.
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Intel refused to discuss its approach to 401 (k) vigilance or make the executives who monitored the investments available.
But a March 2010 Morningstar report on the Global Diversified Fund stated that Intel’s investment commission plans to add alternative investments by reducing portfolio volatility and generating higher performance.
The fund failed to achieve these goals, the report said. Its annual performance of March 31, 2014, for example, was a full percentage point below its benchmark, according to the report.
Bill Parish, investment advisor at Parish & Company in Portland, Oregon, is a big fan of Intel and has its shares for its customers. In an interview featured Intel’s retirement plan as “good” but said it would be even better if he had defeated hedge funds.
Last year, in an email to Andy D. Bryant, chairman of Intel, Mr. Parish expressed concerns about those investments in the retirement plan. Mr. Bryant responded by saying that he would forward criticism to the appropriate Intel officials, according to the email.
“My prospect, regardless of the fact that it is a prudent diversification, does not have any sense of investment,” said Mr. Parish. “It would be better for Intel to completely eliminate hedge funds because they do not meet the standard of financial disclosure. They are too opaque.”
In fact, fundraisers with the Department of Labor indicate that Intel has designated it as difficult to fully leverage $ 1 billion of $ 12 billion in fair value of total retirement assets at the end of last year. They are known in terms of accounting as level 3 activities and the declared value of such investments is based on significant “unobservable inputs,” Intel said. In other words, values are estimates.
Some are in vehicles that can not be sold at any time. About $ 830 million in plan assets consist of “unrestricted partnerships” in real estate, energy and venture capital, exposure to fund deposits.
“These are closed funds, which are not eligible for redemption until a future date that can not be determined today,” says Intel. “The liquidation of these investments is likely to take place at different times over the next 10 years.”
Gregory Y. Porter at Bailey & Glasser in Washington is one of the attorneys representing Mr. Sulyma, who remains a participant in the Intel plan. Mr. Porter said he believes the case is significant not only for Intel employees, but also as a warning for retirement account holders