Interest to terminated participant

[Guest AEA]

I have a terminated employee who is demanding interest be paid on his distribution and I can't find anything to support his claim.

The plan has quarterly valuation and does not contain any language regarding payment of interest or earnings during the time between valuations. The employee was terminated in 12/99 and requested a distribution on 12/28 or 12/22. The plan says payment will be made as soon as practical but not more than 60 days after end of plan year.

Former employee received distribution on 2/24 based on 12/31 valuation that had just been completed. He now claims that the plan has to pay him interest of 5% on the distribution for January and February. His support is that the plan must be held for the exclusive benefit of participants and since he did not get the "earnings" (actually 2% or less) the trustees must have received his money and that violates their fiduciary duties.

In reality, the "earnings" for the entire fund for the quarter were allocated among current participants on 3/31.

Is there any caselaw (or something) that supports him?

[bzorc]

It sounds like you followed your plan document. In a quarterly valuation setting, you paid him the correct amount; that is, the 12/31 balance. The participant does not share in any trust gains (which is a benefit to the other participants), which is why he is upset. If the trust had been in a loss position, do you think you would have heard the same complaint? In that situation, the remaining participants in the plan take a hit. That is why so many plans have converted to daily valuations, so that the participant actually receives that value of his or her account on the day of distribution.

I had one plan take a unique approach to the problem you describe, as they received numerous complaints like you did. The procedure they followed goes something like this:

1. Distribution forms received by 12/31 (or any quarter end): The 9/30 value of the account would be moved from the investment funds to a money market account set up in the plans' name.

2. Any additional distribution requests received by 1/15 would have their 9/30 values moved to the money market.

3. Upon the completion of the quarterly valuation, any additional investment earnings on behalf of the above amounts would be moved to the money market. If the investments had sustained a loss, money would be moved back from the money market to the investment funds.

4. The interest earned on the money market account would be allocated to the participants, and then this value would be paid out.

This procedure quieted the complaints, but not the whining, especially when the market was up in that 4 to 6 week period after quarter-end. Please note that the client fully documented this procedure and handed it out to all plan participants. It also received the blessing of the corporate attorney. Finally, our firm charged a significant premium (usually a charge of between $500-1,000 per quarter) to perform these gyrations.

End result, if this is a major pain for you, consider converting the plan to daily valuations.

Hope this helps.

[Guest FREE401k]

We handle a large quarterly valuated plan and often hear this complaint from participants who have left the company and are taking a distribution. We point out to them that interest is allocated once a quarter, on the last day of the quarter, to everyone in the plan at that time. If they withdraw their money during the quarter, they won't get any interest for that quarter as they weren't in the Plan on the last day. But here's the clincher: We point out to them that while this procedure means they may have lost a little interest in the last quarter, every quarter that they were in the Plan they actually received a little MORE interest than they were technically due, because they received a portion of the interest earned by all the people who withdrew their money during all those quarters. Just like their interest will be allocated at the end of the quarter to everyone else still in the Plan, in every previous quarter THEY WERE THE RECIPIENT of interest earned by people who had withdrawn their money during the quarter. So in addition to this being how most quarterly valuated Plans work, it is also imminently fair, and most people see that if we can get them to listen and understand the explanation.

[This message has been edited by twilliamson (edited 05-26-2000).]

[Kirk Maldonado]

What if the investments went down (between the date of the termination of employment and the date of the distribution)? Would the participant demand that he pay back some of the excess amount that he receives? If the participant wants the upside, then he has to accept the downside.

Using quarterly valuation is rough justice.

[Guest Connie]

AEA,

Twilliamson's explanation is correct. Unfortunately, it may be little consolation to your participant, but that is just the way it is. Your participant's contention that the plan must pay some interest is just not true, unless its been done in the past.

Some participants will do their best to make your life miserable over something like this. Until we were able to move to daily valuations, we simply dug in our heels and stuck to our guns. As bzorc points out, taking steps to avoid this situation is expensive, time consuming and still does not mollify everyone. And he's right, if the market had lost 15% during that lag time, your participant would not be unhappy at all.

Good luck

Connie

[Guest]

From my earliest days in working with defined contribution plans, I was taught to separate the "Plan issues" from the "Trust issues". One of the most difficult concepts for a participant to understand is that the "Trust" owns the assets, and the Trustees set the rules of how earnings allocations are done. The participant owns an "account" that is part of the trust and receives allocations of any earnings (gains or losses) as dictated by the trust document. Therefore, if the trust indicates that earnings are allocated at the end of each calendar quarter, then so be it.

Even in a daily valued plan, this problem is not totally resolved. Once again, the earnings are allocated to the "trust", which is typically an account that is established in the name of the trustees of the plan (say a mutual fund). The earnings distribution paid by the mutual fund company is based on a specific record date and payment date. If the participant had a balance on the record date, some would argue that they are entitled to the gain (or loss) paid on that date because they had an account balance on that date. This can be a real pain, because now it causes multiple distributions to be processed for the participant. It only gets worse if you have an investment that pays monthly earnings! Once again, the trust document needs to address this situation.

Bottom line: communication to the participants on how earnings (gains and losses) are handled by the plan and trust is essential.

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Carol J. Ringwald

President

CJR Consulting Group, Inc.