Charge Offs/Write Offs

[Fredman]

I'm looking for some research on the amount of charge offs/write offs a TPA running daily valuation generates. We are trying to determine how we stand up when it comes to the errors we make and the costs associated with errors.

Any information remotely close to this topic would be appreciated.

[Disco Stu]

This isn't exactly on your point, but I'd like to hear others' feedback on this.

Apparrently it is becoming more common for recordkeepers to maintain a "gain/loss account" either inside or outside a plan to offset obligations for recordkeeping errors.

The rationale being that if a correction had to be made, and after that correction there were extra shares or dollars, they would be put into this gain/loss account. The next time an error occurred and the participant suffered a loss, the funds in the gain/loss account could be used to offset the damage to the recordkeeper.

This raised a lot of alarms with me, but I have heard anecdotally that this pratice is widespread and that there has been some sort of IRS blessing.

I seems like this would be easier to pull off in the bank or trust company setting, where there are omnibus accounts to hold this money. As a TPA, I wonder if such an arrangement is feasible. I don't see how you can hold unallocated money inside the trust. Even if I wanted to move money out of the trust, I wouldn't have a place to hold it.

Does anyone have any experience with this?

In answer to the original post, my firm has never made a mistake, and never will. :-)

[Fredman]

I'm moving this to the 401(k) board (previously housed in Operating a Pension Firm board) in hopes for some additional comments.

Thanks!

[Guest JimJ]

Well I'm not sure if this is good or bad, but I have experienced this in both a bank and TPA environment. Obviously, the banking environment with the use of omnibus accounts is much easier when maintaining a “gain/loss” holding. Reconciliation and cash movement is not a problem (legally not sure) but from the recordkeeping standpoint is extremely simple. Now, on the TPA side it becomes a bit more complicated. What was initiated was a non-interest bearing cash account outside of the plan trust but within the overall trustee/custodian relationship. Any gain from minor errors would be placed in the account and a normal daily reconciliation is preformed. The reconciliation not only detailed the error and corrective actions but also the plan from which it came. This was completed with a simple program I developed in MS Access. Of course we never make mistakes, so the activity level was very low. If an error was made which resulted in a loss and money was available in the account for that particular plan is was then placed back into the trust to make the plan and or participant whole. Again, I'm not commenting on the legalities but rather the logistics.

To answer the original post, I believe we averaged about $5k to $8k annually out of pocket for trading errors. We ran approx. 250 plans and nearly $2 billion in daily assets.