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Allocating cents to 401(k) subaccounts


Guest hk73

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For an owner-only 401(k) plan, how should fractions of cents be allocated when allocating investment earnings to the various subaccounts (pre-tax, after-tax, Roth subaccount etc.)? How often should earnigns be allocated and rounded to cents (if at all)? Should the subaccount balances be carried forward rounded, or if not, with how many decimal digits, after each accounting period (plan year or contribution/distribution events from/to subaccounts)?

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How is the answer to this question ever going to be material?

I would always round to a penny. If you think it some how matters why not just rotate which one? In period 1 pre-tax. In period 2 after-tax.....

In the end the total has to = the actual assets.

And once again this just isn't a material issue and you are over thinking it in my humble opinion,.

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Allocations of gains should be done on each valuation date. That would be yearly in my pooled plans, unless a special valuation date is declared, which would be a waste of time for a one-man plan. Round according to your best judgment.

Ed Snyder

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Allocations of gains should be done on each valuation date. That would be yearly in my pooled plans, unless a special valuation date is declared, which would be a waste of time for a one-man plan. Round according to your best judgment.

I know fractional cents are immaterial, but I just wanted to make sure there are no specific regulations.

Bird: Other than on annual valuation dates, I think valuation and allocation to subaccounts has to be done at least on each day of a contribution or distribution from any subaccount, to arrive at the pro-rated allocation depending on the balances in the subaccounts on the day of contribution/distribution. I assume the earnings have to be pro-rated for each period between contributions/distributions separately, to account for the time-varying ratios of the subaccount balances over the year. Please let me know if that's correct. Just wanted to make sure we're on the same page.

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Allocations of gains should be done on each valuation date. That would be yearly in my pooled plans, unless a special valuation date is declared, which would be a waste of time for a one-man plan. Round according to your best judgment.

I know fractional cents are immaterial, but I just wanted to make sure there are no specific regulations.

Bird: Other than on annual valuation dates, I think valuation and allocation to subaccounts has to be done at least on each day of a contribution or distribution from any subaccount, to arrive at the pro-rated allocation depending on the balances in the subaccounts on the day of contribution/distribution. I assume the earnings have to be pro-rated for each period between contributions/distributions separately, to account for the time-varying ratios of the subaccount balances over the year. Please let me know if that's correct. Just wanted to make sure we're on the same page.

Depends on the document.

If there is only one allocation date then per the plan then there is only one allocation date. The plan administrator can use reasonable assumptions to give the weighting you are talking about. (Although most plans allow for special allocation dates I see no reason for the extra work)

Is this a balance forward plan?

If so, for example you could allocate gains to the 401(k) source by taking Beg Bal + plus 50% of the 401(k) deferrals is the adjusted balance for that sub-account,. That is how most 401(k) plans were done before they all went daily.

Example:

401(k) source has $50000 at 1/1

PS source has 30000 at 1/1

401(k) def for year were 10,000

401(k) basis for earnings is

50000 + (10000*50%) = 55000

So earnings to 401(k) would be allocated on the ration of 55000/85000* earnings

PS earnings would be allocated 30000/85000*earnings

If this is daily valued then I am not understanding the facts.

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I agree with ESOP guy. Our older documents specified the exact allocation basis for each source (e.g. beginning balance for PS, beginning balance + 1/2 of the year's contributions for deferrals). Our EGTRRA document says:

For purposes of the allocation investment earnings and losses, the Plan Administrator may adjust the value of interests of Investment Funds in Accounts as of the preceding Valuation Date to account for any contributions, distributions or withdrawals that occur after such preceding Valuation Date.

That leaves it to the PA. I would definitely not adjust the allocation basis with each contribution unless the plan is daily val'd.

Ed Snyder

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I agree with ESOP guy. Our older documents specified the exact allocation basis for each source (e.g. beginning balance for PS, beginning balance + 1/2 of the year's contributions for deferrals). Our EGTRRA document says:

For purposes of the allocation investment earnings and losses, the Plan Administrator may adjust the value of interests of Investment Funds in Accounts as of the preceding Valuation Date to account for any contributions, distributions or withdrawals that occur after such preceding Valuation Date.

That leaves it to the PA. I would definitely not adjust the allocation basis with each contribution unless the plan is daily val'd.

This thread evolved from a question about fractional cents to the question of allocating earnings and losses to subaccounts, and the timing of allocations in general.The plan document of the 401(k) plan that I'm concerned with is silent on how to allocate earnings or losses to subaccounts. In pertinent parts, the document says:

"Section 6: Plan Accounting and Investments: A participants's portion of the Trust assets is determined as of each Valuation date [...] The Trustee must value Plan assets at least annually. However, the Employer may elect operationally to value assets on a periodic basis. The Trustee and the Plan Administrator may adopt reasonable procedures for performing such valuations. [...] Adjustments to Participant Accounts: Unless the Plan Administrator adopts other reasonable administrative procedures, as of each Valuation Date, each Participant's Account is adjusted in the following manner. [...] Net income or loss: A Participant's Account will be adjusted for any net income or loss in accordance with any reasonable procedures...

Section 8: Trust Provisions: [...] The Plan assets will be valued at least on an annual basis. The Employer may designate more frequent Valuation Dates. Also, the Trustee and Plan Administrator may agree to value the Trust on a more frequent basis, and/or perform an interim valuation of the Trust."

The document does not say what the actual financial impact of "performing a valuation" on the trust level in the last cited paragraph is, i.e. what the results are used for, therefore I'm not understanding the point of this provision. I can perform a valuation every minute, if I'm so inclined for my personal education or entertainment, or every year, and store the results or discard them, which seems irrelevant to me when it doesn't say where the numbers go.

The document is completely silent on allocation to subaccounts of Participant's Accounts. Moreover, if I read them right, the cited provisions appear to allow any number of valuation dates for any or no reason, at any intervals, regular or irregular. I assume I can do e.g. a daily or a yearly valuation. On top, on each valuation date, the allocation to accounts can apparently be performed in any reasonable manner, presumably consistently.

After thinking through all this, I personally find daily (instantaneous) valuation easier in the long run. All investments are in a brokerage account, daily balances of which are readily available. Any kind of "forward" (i.e. delayed) accounting will result in complications e.g. it would be hard to zero out certain accounts with pending earnings; in a falling market, cashing out an account based on a stale balance may result in negative balances, etc., which I can imagine may cause administrative and accounting headaches.

Please anybody correct me if my conclusions are wrong.

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I think you can do what you want. If it is your own plan and you want to have fun with allocating dividends and interest as they occur, go for it. If you are doing it for someone else, I find it hard to believe it is more efficient to do it daily val if it is invested in a brokerage account, but whatever works for you.

Ed Snyder

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