NEW YORK - Sandoz Corp. is dropping securities lending for its $540 million 401(k) plan.
The company is concerned about the risk of the program, said Todd A. Tibbetts, manager-trust investments and foreign exchange, who evaluated the program.
The lending has been done through a $127 million Standard & Poor's 500 Stock Index fund by the manager of the portfolio, which is not being terminated. Mr. Tibbetts declined to name the manager.
"We feel (securities lending) is a very poor risk-return tradeoff," Mr. Tibbetts said, who wrote an evaluation of the lending program for the pension committee.
The program was expected to provide a 15 to 20 basis-point incremental return, based on the entire value of the portfolio, or about two basis points, based on 10% of the portfolio lent, he said.
"I'm not sure the program has provided any incremental value," he said. "It probably subtracted value as a whole," he added.
In the long run, he thinks the program might provide a positive incremental return - but only at an unacceptable risk level - by aggressively trying to seek borrowers and then reinvest the cash obtained by lending.
The main reason for the higher risk is that the nature of securities lending has changed through aggressive lending and investing techniques and "perverse" fee arrangements, he said.
"It's no longer a fee for (lending) a needed security," he said. It's a return that comes more from investing collateral than from the fee for lending the securities, he said.
In addition, he said, "the mode of compensation is perverse. Lenders charge a "hedge fee schedule for their management," getting 50% of the incremental return from the lending. "And the way they make money is simply investing in riskier instruments."
"They are making us accept the risk and paying themselves handsomely for it."
"This is like compensating an S&P 500 manager for beating T-bills," Mr. Tibbetts added.
Other Sandoz retirement plans do not use securities lending.