401k plan recordkeeping, etc.

[Gary]

I am new in the field of 401k plan administration and want to get some explanation of a couple of things.

We'll assume that the plan has a 401k feature and a profit sharing plan feature.

1. If a plan is NOT self directed and all plan money is in one trust account, not segregated, then my understanding is that the recordkeeping is allocated for each participant based on the overall return of the trust fund, including taking into account transactions. Therefore the account balances for all participants must be computed based on total plan assets by the plan adminstrators and the bank or trust custodian does not play a role in this matter.

Is this basically correct?

2. If alternatively, a plan is self directed then my understanding is that each participant must have a segregated account that is determined presumably by the custodian (i.e. Schwab, Fidelity, etc.). And thus it would seem that the plan administrators (if not Schwab, Fidelity, etc.) would not be required to perform record keeping, other than perhaps determine which amounts are vested, since there are segregated accounts. Or perhaps they are sub accounts within the one master trust account.

Is this basically correct?

Thanks.

[Bird]

I'd say you're basically correct on question 1. You've confused me a bit by saying "the recordkeeping is allocated for each participant based on the overall return of the trust fund, including taking into account transactions." Gains/losses and contributions are allocated, not recordkeeping, and "transactions" includes everything that happens in the account, but I think I agree.

On point 2 - it depends. If the plan simply sets up a single account for each participant, without subaccounts, someone has to further break the account down into different sources, such as 401(k) and profit sharing, at least on paper. This is the situation when plans use individual brokerage accounts or other individual account that are not on a "platform." But many investment company recordkeepers will maintain detailed account information by source, and sometimes vesting, on a more comprehensive system or platform. Many insurance companies and mutual fund companies offer these systems.

[austin3515]

Believe it or not there are plans that allow for participant direction that have all investments in one brokerage/trust account and hire a TPA to perform allocations quarterly using a separate software program.

Then in addition to allocating the money to each participant, and to each source, they neeed to determine which invesments (and the related income) are allocated to each participant (at the source level).

This is often done for smaller plans that wish to minimize investment expenses incurred by the plan (through economies of scale), while still allowing participants to choose their own investments.

It's a nightmare though, and I do not recommend it. We beg and plead with our sole client that does this to change to a more sophisticated platform.