Convert Managed PSP to Daily

[Guest jsample]

We recordkeep a plan where participants direct their 401(k) but the PSP is managed by the trustee. The 401(k) is daily valued, but the PSP is valued semi-annually.

Participant loans are allowed from the PSP, but they are general assets of the plan, not assets of the individuals segregated account.

The client wants to convert the entire plan to daily, how do the loans get converted? The trustee is going to liquidate the PSP assets, but technically everyone in the plan has a portion of every loan. Can I just assign each loan balance to the affected individual (after the adoption agreement is amended), or do the loans have to be paid-off and subsequently reissued to the participants?

Thanks.

[Guest timeout]

Unique assets - as you point out, general assets are general assets - recordkeeping is recordkeeping.

I do not know of a broad based solution. My experience: Fiduciaries have found a way to 'clean up' their balance forward trust prior to the conversion date, or paid to run/update 'frozen loan fund' units in each parts. acct. (could be their loan account is their best performing asset ...). Kidding aside, all have steered future loans to run on a daily platform.

[mbozek]

The loans under the PSP are plan assets. The plan administrator has two optons: continue the trust holding just the plan loans until all of the loans are paid back or sell the loans and divide the proceeds among the participants. If the loans are continued the ps plan can be merged with the 401(k) plan and the ps trust transferred to the 401(k) plan and the loan repayments allocated among the participants who had an interest in the ps plan. The non loan assets can be transferred to the 401(k) plan. This problem occurs whenever a plan terminates and has illiquid assets such as real estate that is in forclosure proceedings. I dont think that you can cancel the loan if the term of the loan has not expired and is not in default.

[Guest jsample]

Maybe I am making this out to be harder than it really is.

Once the plan goes to daily, it goes onto the Bank's daily product (and the bank's recordkeeping system). This requires the plan to be a "cookie cutter" design. They will have nothing to do with loan assets that are not included in the individual account.

The bank wants me to do a final PSP allocation and then simply substitute the outstanding plan loan balances to the participants who have them for a portion of their PSP balance.

For example, if I have a $30,000 PSP balance after the final allocation and I have an outstanding loan balance of $10,000. Upon conversion the bank will say I have a $20,000 PSP balance and a $10,000 loan balance, totaling $30,000 - is it that simple?

(A touch of sour grapes may apply as I am losing the recordkeeping business on the plan).

Thanks.

[mbozek]

I guess it will be the bank's problem to allocate the interest from the loans among the plan participants on a daily basis.

[Guest asire2002]

The loans are a type of investment, just like an investment in a mutual fund or stock. Post-conversion, the trustees can direct that a portion of each borrower's account to whom a loan was issued be invested in the participant's outstanding loan. This means the trustee retains investment responsibility over those assets unless the participant elects to invest in his/her loan. If any loans are past-due, you should make sure they are current because you will need to provide the non-borrowing participants who formerly had an interest in the loans with cash equal to the fair market value fo the loans. Consider providing the participant-borrowers with an explanation of what is going to happen and maybe an opportunity to pay off their loan in full before it does. Make sure there is nothing in the loan documents that would prevent what you are planning to do.

[mbozek]

Do you think the trustee is going to want to continue such a responsibility? and will the bank acting as recordkeeper want to do such complex calculations for free??