Employee Deferrals incorrectly invested

[Guest stevena1]

401(k) Plan moves from group annuity to another platform. All terminated participants with funds still in the plan were sent enrollment kits, blackout notice, website instructions, etc. to home addresses.

One particular employee who had been terminated for some time filled out the enrollment form and returned it to the employer. Employer misplaced it and did not send it to the TPA with the other enrollment forms. (Employer admits having received the form). TPA has no enrollment form for this employee and therefore "defaults" the employee to the plan default investment.

Nine months later, employee finally logs on to their account and realizes that the funds have been invested in default account, not according to his requested investments.

Is there any idea out there what responsibility the plan has to this former employee in terms of lost earnings? What time period would the employer be responsible for making up these earnings?

thanks

[Dan]

IMHO the former employee is better known by his plan title, that of 'participant.' So, the employer should treat this person the same as they would any current employee, at least as best they can. With that said, did the participant received any statements since the conversion? If so they could/should have noticed their balance was invested in the default and not according to their elections. Then the participant would bear some responsibility for not communicating the error sooner. In that case, I would be less inclined to recommend the employer make up all lost earnings. But being the conservative type, and given the limited facts, I would probably recommend the employer make up the lost earnings anyway. But they have a reason to say no.

If there have been no statements, then I would stronly recommend the Employer make up all lost earnings. The participant reasonably expected the employer to comply with their request, so the burden shouldn't be on the participant to confirm a reasonable expectation. In this circumstance, the employer simply blew it and should make the participant whole.

As an aside, given the recent market conditions, the actual lost earnings could be less now than if they made the correction in early May. It could even be that they were no lost earnings.

It was the employer's obligation to make sure everything was done properly, and in this case they didn't do it.

Dan

[Guest stevena1]

Statements are all online, no paper statements. But, the participant did get the website instructions.

We did think of that...due to the market decline, that there could possibly be no lost earnings at this point. However, the participant is insisting that the makeup should be from the time that he sent his election form to the time he first notified the employer of the error...not taking into account the recent downturn.

Thats why I asked the question about the period of time, is it reasonable to say that they would make up earnings until "today", but "today" really has no significance, since the participant actually notified the employer before the recent downturn..this has been going on for about a month now.

[wsp]

Statements are all online, no paper statements. But, the participant did get the website instructions.

We did think of that...due to the market decline, that there could possibly be no lost earnings at this point. However, the participant is insisting that the makeup should be from the time that he sent his election form to the time he first notified the employer of the error...not taking into account the recent downturn.

Thats why I asked the question about the period of time, is it reasonable to say that they would make up earnings until "today", but "today" really has no significance, since the participant actually notified the employer before the recent downturn..this has been going on for about a month now.

Since you're using online platform I would assume that it's a daily traded account and thus is share accounting. If so, it's easy.

Calculate the number of shares that would have been purchased on the original date had his directions been followed. Then apply any dividends reinvestment or capital gain purchases that would have been made to the account. That's the number of shares that need to be purchased to make the participants account whole. The value of the shares on any other given date are immaterial (including the notification date). Only thing to discuss is with the custodian of the assets. Can they purchase up the assets and then notify you of the cost so that the client can wire the necessary funds. Your goal is to make the account whole not provide punitive earnings numbers to the participant.

[JanetM]

It should be simple matter for TPA to post the transactions and correct the account. One issue to address, is there forfeiture account to get from or send to the difference? The account needs to be corrected, the plan must be operated in compliance with its terms.

Gut reaction is the participant is going be out a bit of money when this is all said and done.

[E as in ERISA]

Be careful. That might be how the calculation is done if immediate. But what if the participant went in that day to find information because he was contemplating a transfer. He saw the error and requested a correction immediately. Failure to fix immediately has possibly caused him a loss. Harder to calculate now.

[Dan]

The actual date the participant is made whole shouldn't matter. If the correction was done the day he called, he would still have the same number of shares. The argument could be made that he would have transferred the funds to a stable value right before the recent downturn, but that is dubious at best. As for the length of time to do the correction, corrections do take time. That is a fact of life. Our lives anyway.

It's hard to argue the participant has a suffered a significant financial loss due to a one month delay in making him whole. And it isn't appropriate to enrich the participant because an error was made and good faith efforts were employed to make him whole.

To the participant who says it's not fair to correct this error today, I would say the timing of this thing is unfortunate, but all errors unfortunate. But in this case he could be given two investment results to choose from. He could choose from the default fund or his investment election, whichever was better during this period. I would like to have such a choice. Since the error was unintentional, making the participant's account as if it were done correctly in the first place should be sufficient.

I think JanetM might be right in that the participant might be better off where he is. But math can be done to make that determination.

[wsp]

I don't agree that you give him a choice between the two. His original instructions were to make a transfer. He has brought it to the plan's attention that the transfer was missed and needs to be corrected. Thus, I think the plan's hands are now tied and they must correct. Even if it's to his detriment. He should have kept his mouth shut and made the request again if he's better off. My guess is he's done the math and knows he's not better off quite yet and he's trying to get maximum money...classic shakedown of the plan. Don't give a choice of whether to correct, the correction method, or the timing of the correction. Just get it done using share accounting and get it done quickly.

And I agree that "would have's" are dubious. If that was his true intent then he would have made that transfer into the stable value or at least told the plan administrator to make this correction quick because he want's into the stable value. Can't go backwards and say "I wanted to do this or that...."

My only question would be...if it turns out that additional money is needed to make the participant whole, can you use forfeitures? I would think not if forfeitures are allocated but it would be ok if they are offsetting contributions. Agree?

[Dan]

I ran across this today. The court decision addresses a nearly identical issue.

http://www.plansponsor.com/pi_type10/?RECORD_ID=33952

The article offers a link to view the decision.

It looks like individual participants whose elections aren't followed can legally be told "tough luck."