Another Acquisition Loose End: Closing Out Wrapped Contracts
Of the thousands of loose ends that we will encounter in the Sun-Oracle combination, one that is of great interest to me--regardless of whether I survive--is how we wind down the Sun 401K plan. Got to thinking about this when I noticed that Dwight Asset Management Company, the custodian of our stable value fund, began publishing monthly "Notes to Investors", after not having published such notes for a year.
It's pretty obvious what's on the minds of the folks at Dwight. Such notes to investors always contain standard text on risk. For a fixed-income vehicle like a stable value fund, the risk factors are inflation and credit risk (that a bond or wrap issuer fails). These Dwight always mentions. However, in recent months, they've highlighted a couple of additional risks:
- Plan sponsor event risk. To quote: "Plan sponsor actions that could present this risk include bankruptcy filings, plan or fund terminations (emphasis mine) and certain layoffs or early retirement programs, each of which may be paid at market value, which could be less than the book value depending on the performance of the Fund's wrapped assets."
- Cash flow risk. "...the possibility that the earnings rate on the Stable Value Fund may be impacted by the investment decisions of other plan participants." IOW, if everyone goes for the gate at once, not everyone is going to get out will all they came in with.
These make eminent sense to me, based on what Dwight is doing, which is really quite remarkable: in this multi-year, near-zero-interest-rate environment for short-term instruments, they offer a liquid (to what degree, we may test) fund that pays about five times the interest of the best, most cheaply run money market funds. (Dwight has consistently paid a shade more than two percent, while the biggest Vanguard and Fidelity MM funds pay around .2-.5 percent.) Dwight does this with lower expenses than even Vanguard pays on its Prime Money Market fund, which is something of a benchmark for low costs.
Of course, Dwight is in the position of George Bailey: the hundreds of millions they list in their fund is not really all there at the same time. If Sun/Oracle were to say: we're shutting down the Sun 401K in 90 days (for example), that would not be sufficient time for Dwight (or anyone) to unwind their various wrapped contracts without taking a big hit to the net asset value of the fund.
Sun, or Oracle/Sun, probably wants to terminate the Sun 401K as soon as possible. Why would Oracle want to pay for two 401K plans? Dwight and the holders of assets in the Dwight fund, each for their own selfish reasons, want the plan to continue to exist as long as they need to unwind (or recoup) in an orderly fashion. Beyond these obvious things lies the vast ocean of my ignorance. Does Sun, or Oracle/Sun, have any legal obligation to Sun 401K plan participants to, as far as possible, sustain the price of their stable value fund? Would the p.r. hit of a precipitous termination of the Sun 401K plan be a sufficient incentive to Oracle to go slow? Do our (Sun) executives have sufficient funds with Dwight that they might be inspired to some innovative solution?
Incidentally, I don't see an abrupt shutdown being a big problem with any of the other funds in Sun's 401K. With the possible exception of one Goldman fund, they are all giant, big-name funds. For all the funds but the stable-value, a large, one-time requirement to raise cash would probably not force them to make moves that would deviate hugely from their fund strategies.
