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Return of investment "re-pricing" losses - how to allocate?


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Employer sponsored a 401k plan. In the early 2000s one of the investment funds was "re-priced" causing a loss in the fund. Thereafter, the plan switched investment providers. In 2005 the plan sponsor filed bankruptcy. All participants have received distributions and there are no assets remaining in the plan. In 2008 the plan sponsor receives a check from the former investment provider representing the recovery of a portion of the fund's losses (in excess of $20,000). There are no current participants in the plan, the plan sponsor is not operating and has no employees. The bankruptcy is still open and the plan has not been terminated (that we know of). We have also been told that the records need to allocate the recovery funds (if that is what is required) no longer exist. The bankruptcy trustee is seeking guidance on what to do with the recovery funds. Any suggestions?

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The funds ought to be allocated to the people who suffered the loss. Obviously if those records don't exist that is a problem. (What can't help but wonder why the question is coming up now if the check was received in 2008 not that it changes anything. What is done is done.)

Does anyone have copies of the 1099-R for the people paid? That would allow you to establish everyone's balance at the close of the plan. Not a perfect proxy to allocate the $20,000 but better then nothing.

I guess have all the plan's fees been paid? (Raise you fees to $20,000 :lol: ) If not you could pay fees with it.

It sounds like it is a trust asset and it should pay trust expenses or be paid to the participants.

Just spit balling ideas here.

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ESOP Guy - thanks for the response. We were just hired by the bankruptcy trustee to figure out what to do with this money and we are still trying to find out exactly what the status of the plan is and what records they do have. I have not determined why the trustee is just now addressing this if the funds were received in 2008. I would probably attribute it to other more pressing bankruptcy matters. This company has been basically out of business since 2005 and nailing down details about the administration of the plan since then has been hard. If we can't find information regarding participant balances, I was going to suggest distributing the funds equally among the participants. The problem is determining what date to use as the participant pool - 2005 (when the plan sponsor received the funds) or 2003 (when the losses were incurred in the investment). Arguably if a participant entered the plan after 2003 (when the investment was no longer available), they were not harmed by the loss and have no right to share in the recovery. I did locate a PLR from 2002 (discussing distribution of demutualization proceeds regarding a terminated plan where the plan sponsor did not want the funds to revert to it, but instead wanted to distribute the funds to the participants) that is instructive, though not completely on point. AT the end of the day we know this is a fiduciary decision and just want to make sure we are doing right by the participants (with the limited information we have!).

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Unless you have records that go back to the mis-pricing, then I would just allocate it pro-rata on the original distribution amounts. If the plan is not terminated, you won't be able to force out someone if they get more than $5,000.

Where has the $20,000 been sitting? You'll probably have to allocate earnings, too.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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