Interest accrual in daily valued plans?

[John A]

I'm interested in how others handle daily accrual of interest in money market and bond funds. Is there a standard industry practice?

For example, if a money market fund pays interest quarterly, do you account for daily accrual of interest during the quarter, or do you only add the interest when actually paid? Do you handle bond funds differently than money market funds?

If a company has not been taking interest accrual into account, does the company need to take any actions?

[Guest Jim Kais]

Based on my experience, most daily valuation recordkeeping systems would track a daily accrual for money market funds and some bond funds. As an example, if your fixed income vehicle paid a monthly div and a participant terminated and triggered the payout 5 business days prior to month end, they would receive an accrual through the date of term. I've seen this on the VISION/Omniplan system, but not sure if it is core functionality. Good luck.

[Fredman]

Our system tracks daily accurals and automatically posts them with a triggering event (transfer out, distribution, etc.) just like Jim mentions. Which makes sense since I'm using a variation of the Omniplan system.

This can create a headache. If there is only 1 participant in a daily accural fund (not common, but it happens) and that participant decides to transfer out mid-month, you have a situation where the trust is short that accural until its paid by the fund company. Again, not very common, but it does happen.

I'd be interested in other people's thoughts, but I think it would be a real pain to administer by posting interest/dividends when they are received.

[Guest Carol Ringwald]

I do not recommend that you do a daily accrual for money market or bond funds. I have been processing plans in a daily environment since 1986 (ok, I'm really showing my age) and have never processed an interest accrual for bond or money market funds.

We recommend to the TPA firms for whom we providing consulting that they setup the money market or bond fund as a cash account that carries a value of 1. Then, when the interest is paid by the fund at the end of the period, typically monthly, the TPA would spread that interest to all participants in the plan on the date they are posting the transaction.

If a participant leaves in the middle of the month, so be it. They just do not receive their pro-rata portion of that month's interest amount. In all my years in providing daily services, I have never seen this been an issue with a participant.

Most of the recordkeeping systems are setup to handle the accrual. However, as suggested by Fredman, there can be a problem of having enough cash to fund the accrual. If you are acting in a non-fiduciary capacity, as most TPA firms are, you probably do not want to be the entity that "funds" the shortage. It will have to come from somewhere, typically the employer, since the custodian issuing the check will typically only issue an amount equal to the cash they have on hand.

[Guest Poorna]

In the event that the daily interest accrual is done, and there is a situation where the trust is shorted until the fund company pays the interest amount, is there any exemption granted by the DOL for this? I have seen the DOL PTE 80-26 which gives a three day grace period for interest free loans. Is there any similar exemption or leeway granted in the interest accrual for daily valued plans?

[bzorc]

To respond to Carol's post, in my experience interest was accrued on money market funds on a daily basis, based on a factor provided by the money market provider. At the end of the month, when interested was actually posted, a "true-up" interest allocation was performed. This step was necessary as we had participants who transferred or were paid from a money market fund during the middle of a month who complained (and in some cases, complained vehemently) that they had earned no interest during the period.

Sad but true.

[Guest jsample]

There was an excellent article titled "Share Accounting vs. Unit Accounting" in The ASPA Journal that, among other issues, talked about this. Try the ASPA website to see if you can find it in the Mar-Apr 2002 issue.