PALO ALTO, Calif. - For years, Brentley Coates listened to the conservative investment guidance proffered by Hewlett-Packard Co. officials. At age 55, during the peak of the late '90s bull market, Mr. Coates shifted his entire retirement account into the profit-sharing plan's fixed-income option.
But seven-and-a-half months later - just as the stock market was starting its downward slide - Hewlett-Packard and newly spun-off Agilent Technologies Inc. ended the fixed-income option in their jointly managed plans, forcing reinvestment in the sole remaining balanced fund.
As a result, Mr. Coates - who transferred to Agilent during the spinoff - has lost one-third of the value of his portfolio and has filed a lawsuit against Hewlett-Packard, Agilent and their respective deferred profit-sharing plans. If certified as a class action, the suit would represent some 1,500 participants in the two plans, which collectively had $2.8 billion in assets as of Oct. 31, 2001, the latest available data.
"I was shocked," Mr. Coates said in an interview. He said he asked company officials, "Why are you having to do this?"
If Mr. Coates wins his lawsuit, it could mean both companies and their plans might have to pony up hefty sums to make up for investment losses. But a ruling would also provide guidance to companies as to whether the decision to end an investment choice in a qualified plan is a business decision or a fiduciary one.
Officials at both Hewlett-Packard and Agilent declined to comment on the lawsuit or on the terms of their plans.
Started in October 1956, the Hewlett-Packard Deferred Profit-Sharing Plan required the company to contribute 10% of its adjusted net income each year to participants. Hewlett-Packard, like most companies, took responsibility for investments: assets for employees younger than 55 were invested in Fund A - a balanced fund with roughly a 60/40 split between stock and fixed income.
Starting at age 55, however, the plan required a growing portion of a participant's assets to be transferred to Fund B, a fixed-income fund. All assets were shifted into bonds when the participant hit age 64.
In 1990, however, Hewlett-Packard ended the compulsory switch, allowing participants to decide every October how they wanted to divide their assets.
"In the '90s, they said, `We'll treat you like big boys, and allow (you to decide) how much you can put in either" fund, Mr. Coates said.
The profit-sharing plan was frozen in 1993, however, and replaced with a new defined benefit plan - at a time when many companies were abandoning traditional defined benefits plans. The company made all of the contributions for both plans.
Defined benefit offered
Under Hewlett-Packard's revised benefit formula, existing employees would get the better of the old profit-sharing or the new defined benefit plan benefit for service before Nov. 1, 1993, according to company documents. The defined benefit plan would cover accruals after Nov. 1, 1993.
Mr. Coates, who joined Hewlett-Packard in 1968, attended company talks about the benefits package.
Company officials, he said, always said assets were transferred to the fixed-income fund to avoid being hit by "a big market downturn in the employee's last year" before retirement.
So when Mr. Coates, who sold test equipment to some of the company's biggest customers, hit 55 in 1999, he decided to get out of the stock market.
"At the time, I actually received a lot of coaching that was a silly thing to do," he said, given the stock market's meteoric rise. "I decided it was a prudent thing to do."
On Oct. 12, 1999, in a hand-written note, he confirmed his investment choice to company officials. "I have made this same election using TABS (the company's benefits system) several days ago, but I am always fearful that maybe I pushed the wrong button," Mr. Coates wrote.
In a $2.16 billion initial public offering in November 1999, Hewlett-Packard spun off 15% of its measurement and medical device business into Agilent.
Single group trust
The old profit-sharing plan was being divided into separate plans for Hewlett-Packard and Agilent employees, but officials at both companies announced the following May that assets of both plans would remain in a single group trust. Hewlett-Packard would continue to manage the assets, with Boston Safe Deposit and Trust Co. continuing as trustee.
And the officials added another surprise: the fixed-income portfolio was going to be liquidated because of unspecified securities law concerns.
A question-and-answer sheet distributed to employees of both firms explained that "having a choice of investments in a group trust under U.S. securities law creates compliance issues."
All participant assets invested in Fund B, the fixed-income portfolio, would be transferred into Fund A, the balanced portfolio on May 31, the document said.
Even though the plan provides a guaranteed level of benefits, Mr. Coates, who has been on worker's compensation since April 19, 2002, said his account would probably have to plunge "60% to 70% before you hit the floor."
Now, his lawsuit claims the forced liquidation of the fixed-income portfolio was imprudent. His lawsuit alleges Agilent and Hewlett-Packard officials violated their fiduciary duties in failing to consider the earlier investment policies, ignoring the different investment time horizons of younger and older employees, and disregarding the risks of forcing older workers out of the fixed-income holdings.
Whether the decision to end an investment option in a defined contribution plan is a fiduciary decision or a business decision, will be put to the test.
Alfred H. Sigman, an Oakland, Calif., pension lawyer who represents Mr. Coates, said company officials were acting as fiduciaries in ending the fixed-income option.
"To put (all participants) into one-size-fits-all is imprudent," he said.