Help with TPA Error

[Guest MaryMac]

We converted our plan to a new TPA and a daily valuation platform in late 2002.

At that time, we had employer-directed profit sharing money with one investment broker, and individual 401k accounts with American Funds. The 2 partners had legacy 401k FBO accounts with the same third party as holds the profit sharing.

The TPA seems to have correctly allocated the American Funds FBOs to the participants.

Our choice was not not convert the partner's 401k accounts and leave them as outside investments.

The profit sharing investments were liquidated. The TPA mistook these funds for the partner's 401k FBO funds and split the amount between the 2 partners. However, it was actually the proceeds of the employees profit sharing funds.

Since then, one of the partners with the erroneous conversion $ in his account left the firm and took a full distribution, including the $ that is not his.

The TPA wants to partially restore the profit sharing accounts of employees with erroneous $ in the account of partner #1 who is still the owner. They want to pursue getting the $ back from the terminated partner before restoring the remaining $ to participants. There is 23K in the active owner's account that is wrong, and 28K in the terminated partner's account that he has taken out of the plan.

Is this the right way to clear this up? We suggested the TPA use their Errors & Omissions insurance to fully restore the part that the terminated partner took, and then use their own resources to get the $ back from him to repay the TPA. They said no. They said our alternative was to pony up with more employer's money.

This just does not seem right? I hope I am making sense.

[pmacduff]

I believe that the fiduciaries are responsible for making the plan whole. That said, I think that the fiduciaries would then have to legally "go after" the TPA to restore those funds back the fiduciaries. That's where the TPA E&O insurance would come into play. I'm no expert, this is just my opinion...and, as always, seeking competent legal advice from someone well versed in this area is the best way to go............

[Guest MaryMac]

Thank you. Yes, we'll definitely consult with counsel if it comes to that. I was just trying to find out if it is normal practice for TPAs to not correct their own errors. Very messy.

[Lynn Campbell]

I would think that the first step is to contact the person who was overpaid, before any more time elapses, and attempt to have the funds repaid. If that person agrees, then things are greatly simplified. I would imagine that the E & O carrier would insist on this before they considered any claim, and the TPA may prefer not to contact the E & O carrier unless necessary.

[Guest Pensions in Paradise]

Did the person who was overpaid receive a lump sum distribution or elect a rollover? If a rollover, you should contact the IRA or plan and inform them they received X dollars incorrectly, and that the amount should be returned to your plan immediately.

[Guest MaryMac]

I am working on getting that information from the TPA. I found out late yesterday that they have known since April...

[four01kman]

It is not typical for a TPA to correct "their own errors" by ponying up cash. The fiduciaries must contact the erroneously paid participant to recoup the excess funds paid. I seem to remember a recent (within the last year) ruling or court case on point. The excess that is in the current owner's accounts should be reallocated accordingly to the adversely affected participants.

[alanm]

I had the same thing happen. If the owner will return the money quickly, there is no problem. Otherwise your insurance policy requires that you notify the company of a possible claim within 30 or 60 days of discovering the error or else it won't pay when a formal claim is made. In the mean time, if the owner indicates he won't return the money, hire a lawyer to file suit and the court will make him give the money back. If you can't get him in court, file the claim and collect on the insurance and the insurance company will go after him. There is no immediate need to put money in the plan unless you find you can't get him to court because he skipped. So I think you have a three month window to see how the lawyer does before you file a formal claim. You should notify the affected participants of the error and the steps you are taking to get their money restored.

[ljr]

I assume TPA's don't come up with the cash to cover their errors since they are not a fiduciary and their service agreements specifically acknowledge their non fiduciary status? Does the service agreement cover errors?

As a corporate trustee with an outside TPA accountable to us (as opposed to the client), we always immediately make the trust whole, including any income/gain, and then collect from the TPA or overpaid participant. If the participant won't pay back the excess distribution in response to our collection efforts, we've let it remain as a loss to us since, fortunately, the amount involved was never enough to make it worth going to court.

If the loss is the TPA's fault, they reimburse us.

I'd be interested to hear more about what others are doing.

How much money is involved in the situation that started this thread?