To revalue or not to revalue?

[John A]

A defined contribution plan defines Valuation Date as "the last day of the Plan Year or such other date as agreed to by the Employer and the Trustee on which Participant accounts are revalued ...". The Employer has always paid distributions using the value as of the last day of the preceding plan year. A participant with a substantially larger balance than most terminated in 1998 and is threatening to sue the Employer if the Employer does not revalue the account shortly before making the distribution. What have other TPA's advised their clients in this situation? Is anyone aware of actual court cases similar to this situation?

[Guest klc]

I have had this same thing occur. It sounds as if your document is open to using another date if so chosen by the employer. I would say that if a "special" valuation date is selected for this situation, then they may need to remain consistent and do the same for other participants in the future. The difficult thing here is to determine "what is a significant account balance"? If this is a plan that does not have a lot of distributions, having special valuations may not be a big deal. Another option would be to schedule them every quarter, but only perform them if there are distributions to be made that quarter.

Another option we have used is to immediately following the period end (valuation date) to pay the person their prior year account balance (you may want to use a reduced figure in case of negative earnings.). Then after the valuation is complete and the person is allocated earnings, pay their earnings seperately, in a second payment. Although this option does not seem to work in your case, it is something to consider for future payouts.

This is always a problem with balance forward plans. The thing that seems to be forgotten is that while participants are in the plan, they benefit more than normal in years where there are benefit payments and positive earnings. It works just the opposite in years with negative earnings.

[John A]

Thanks, klc, I appreciate your input. Just to follow up on some additional issues if the Employer decides to revalue: Would all participants need to be notified that the plan was revalued? Should the employer have some type of written policy drafted about why the decision was made to revalue and/or under what circumstances they might revalue in the future? Could the participant be charged for any or all of the costs associated with the revaluation? By the way, the problem with the argument about the participant benefitting in other years is that this participant is hurt much more in the current year than he was helped in prior years since his balance is such a large percentage of plan assets. Thanks again for your input.

[Dowist]

Not only is this probably discriminatory, but it doesn't seem right.

What would this participant say if there was a revaluation and the value of the account went down?

Why should the plan bend its rules because some participant with a lot of money and clout is throwing his/her weight around? The plan is interpreting the rules of the plan to accomodate one powerful participant. The other participants may not know enough (because they don't really know what's going on, or how it affects their accounts) to object, and the IRS may have a hard time making anything stick, but this is the essence of discrimination.

The only way I would want to be associated with this (unless I represented the individual) would be if the plan changed its valuation dates permanently. The plan and the employer (if they're not the same) should show a little backbone - the plan says what it says and everybody is treated the same, so this person should lump it.

[Guest sacobb]

I agree with Dowist. Once you start making exceptions, you set yourself up for potential problems down the road. I had this same problem occur when the stock market dropped its 500+ points in August of 1998. An HCE wanted his money out of the plan (he owned 70%+ of the plan) based on the June 30 price. We offered him the option of picking a date in the future for revaluation or converting the plan to units and then taking his distribution. I do believe the plan provision that you mentioned is useful in these types of situations (i.e. extreme market swings since the last valuation).

If your plan is participant directed in mutual funds, you could consider converting the plan to units in which case distributions would be paid based on the value of the shares at the time they are liquidated for the distribution. This would, I believe, require an amendment since you are technically valuing the fund daily but it does make it more equitable when distributions are paid out periodically throughout the year.

[richard]

I hate to say it, but "so what if the Participant threatens to (or does actually) sue?"

Aside from all of the other issues discussed in the other responses (which would be costly to address), there is a simple fact that the plan sponsor is operating within the plan language. The plan sponsor clearly has discretion, but is the current approach an abuse of this discretion? Doubtful.

Also, this is technically a denial of benefits (since the participant is essentially claiming higher benefits than actually paid). So has the participant (and very importantly the plan sponsor) followed all of the denial of benefits rules in the Plan and SPD?

Assuming the employee threatens to sue, what do you all think about "suggesting" the employee have his attorney contact the plan sponsor before filing suit. That way, the plan sponsor (or more appropriately his/her attorney) can hopefully convince the attorney not to bother. Especially if the attorney is on a contingent fee basis. (Of course, if the attorney is being paid hourly and his client is willing to keep paying, this won't work.)

Since I am not an attorney, I'd be interested in the thoughts on any ERISA attorneys in the audience. Also, are there any court cases on point?