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Knowing When to Dump a Difficult Client


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We have a client that has a 20 participant profit sharing plan. Assets are pooled rather than self-directed. The majority company owner (key and highly compensated participant) has now retired and sold the company to two junior partners. Rather than terminate the plan, the junior partners (now combined own 100%) decided to maintain the plan and simply pay the retiree his balance from the plan. The plan has a December year end. In December of 2001 he called our office and asked what his distribution options were. We indicated that he could get paid his prior account balance (December 31, 2000 balance, if he were paid from the trust prior to December 31, 2001) or take a distribution during the 2002 year and share in any earnings or losses of the trust through December 31, 2001. In addition, we indicated he could leave his benefit in the plan beyond December 31, 2002 and share in earnings or losses for the 2002 year.

He called a month ago and wanted his distribution based on his December 31, 2001 balance. As of June 30, 2002, the plan lost 24% from its December 31, 2001 value. His 2001 balance was approximately $1,000,000 and remaining employees had about $350,000. He is demanding to receive his $1,000,000 even though making that distribution will almost wipe out all other participant benefits. We mentioned that the plan will be required to perform a special mid-year valuation to allocate losses to all participants (including him) prior to distributing his benefit (i.e. he will share in the loss). The other alternative is to wait until after the 2002 year and hope plan investments recover.

The plan document allows for a special valuation at any time during the plan year. He claims he does not want to share in the losses and does not care if all other participant benefits go to zero.

He is holding us responsible for not for-warning him of this potential problem.

Anyone have thoughts on this?

Thank you.

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Guest b2kates

The real issue is who is the Trustee, the retiree was likely the trustee and he would be suing himself.

Assuming the plan makes distributions using the last valuation, there is no way for him not to share in the losses.

I would have someone raise the issue with the DOL.

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Nasty, nasty situation. There is a ton of case law on this subject that arose in response to the October 1987 stock market crash. During this timeframe, we say fewer daily valued plans, so the facts would be more like your situation. See for example,

Holian v. Leavitt Tube Co., (N.D. Ill., Civ. No. C. 89-0354 (1989), Bachelder v. Communications Satellite Corp., (837 F.2d 519 (1st Cir. 1988)), Pratt v. Maurice L. Brown Employee Savings Plan, (9 E.B.C. 2380 (D.C. Kan., June 30, 1988)) and Pratt v. Petroleum Production Management, Inc. Employee Savings Plan and Trust, (CA-10, Dkt. No. 88-2190) .

You should run these cases through a citator to see what has happened since then. I have not updated this research for a long time. However, the conclusions are not very helpful. They tend to say that the plan can't be amended to change the distribution date (or even to exercise an existing separate valuation date) if that hasn't been done in the past. NOW since this is a former owner, you might have a better case. Since the amounts are so large, I strongly advise getting competent ERISA counsel. (I am not an attorney, just an ERISA historian.)

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Doug:First Q- Who are you-- Are u the TPA, consultant, trustee?? If you are only a hired admin. you cannot be held liable for not informing the owner of the risk of not cashing out because you did not assume the risk of an advisor to the employee-- Employees have to hire their own counsel to advise them on taking a distribution. But you should retain counsel or notify your E & O carrier of a potential claim. Also check to see what the SPD says about valuation of distributions. If the valuation rules are in the SPD distributed to the retiree then he is on notice of the valuation methods.

Second: Whether a mid year valuation should be used is a decision for the plan fiduciary. I dont know why you would want to assume that duty its all risk with no reward.


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Thanks to all for the replies.


We are the third party plan administrator. However, we are a fiduciary plan administrator and sign the 5500 as plan administrator.

We are thinking about contacting our E & O carrier mentioning the potential claim and then asking them if we can retain our own counsel without jeapordising the policy provisions. This way we may be able to choose an ERISA atty who could assess our risk and what our chances are in defense.

The SPD does not mention a mid-year valuation, however, the document does. The retiree potentially making the claim was a trustee and committee member a year ago and signed the plan document. Perhaps this may help us somewhat as by signing the document he has acknowledged reading and understanding all the provisions of the plan, including the provision that allows for a special mid-year valuation.

The document states that the committee, in its sole discretion, may call for a special mid-year valuation at any time. The two remaining partners of the firm are now trustees and committee members. I would think they (in acting on behalf of participants) could enact the special valuation for the protection of retirement benefits for plan participants.

This guy is quite a snake and will certainly plead his case that had he known of the possible (forced) special valuation, would have taken his distribution prior to 12/31/2001 and have been entitled to his $1,000,000.


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Darned if you do, darned if you don't. Depending upon how much value the assets had lost by December of 2001, I question whether a prudent fiduciary could have paid him his full benefit anyway. Suppose there had been a 300,000 loss by December 2001. If the Trustee pays him out his full benefit, the other participants lose the whole thing. And then they would likely have a cause of action against the Trustees.

We wrestle with this in our plans too. And generally tell fuduciaries to retain competent counsel prior to making any large payout if they have reason to know that it would be detrimental to the interests of all the remaining participants - particularly when the payee has had the opportunity to take a distribution for a long time - say more than 30 days - but did not take advantage of it until the market drop occurred months later. That's why most plans have an option for off-anniversary valuations. Good luck!

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