What to do with gains from trading errors

[Guest GMedley]

If we as recordkeepers make a mistake & lose money, we make it up from our profits. But when an error correction results in a gain, it's less clear what should be done with that money.

In this instance we were sent a contribution with the wrong SSN associated with it. Therefore we applied it to the wrong person. Upon discovery & correction, due to the different investment elections the participants had, we find ourselves with a gain of approximately $1700.

This plan uses daily recordkeeping. It seems fair to fix this by reversing the shares purchased by the erronious contribution, thus the gain is not kept by the person who accidently received extra contribution.

Since we'd be making this right out of our pocket if the market had gone the other direction, it does seem reasonable to put this aside to offset errors that do result in a loss. Traditionally, we've never done this, instead allocating this gain somehow to the plan, perhaps thru a reduction in fees.

Does anyone have any thoughts on the proper way to handle these situations? Any references to IRS/DOL documentation would be great.

Thanks.

[Guest]

We set up an account for our company called "Service Recovery". We budgeted a specific dollar amount for errors that might occur during the year. If there was a loss and we had to make that up to the plan, it was paid out of this account. Likewise, if there were any gains we paid them into this account. This account was for used for all plans we were administering.

When I worked for a large insurance company, any gains received were allocated directly to the plan for those participants who had a balance in the fund for which there was a gain.

To my knowledge there is no DOL or IRS guidance on this either. I would setup a standard guideline to us for all plans and then be consistent with how you are applying the gains and losses.