Correcting Accounting / Investment Errors

[Guest RV]

Here's the scenario: You have an error in a participants' investments. In order to correct it you (the TPA, plan sponsor, trustee, advisor, whoever was responsible) make up the money difference to make the participant whole. On the other hand, let's say that making the participant whole results in a "profit" for you. How do you reclaim that from the trust? Doesn't seem right that you can't. Any ideas and cites?

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Richard

[Dan]

If I understand your question, a participant's instructions were not executed accurately. Correcting the transaction(s) would cause the participant to have a lower balance today than if the mistake remained uncorrected. I think that it could possibly fall under anti-alienation rules.

We have dealt with similar instances as described above. We calculated the results comparing participant's investment performance both ways. At each time where the participant benefitted by our mistake, the participant was asked if he wanted us to correct the mistake or allow actual (better) results to stand. I believe you can guess what the participant did in each case.

My understanding of SEC rules indicates that investment providers may not profit from mistakes made to investment accounts, e.g. back-dating a transaction causes account to be worth less than leaving the error in place, thus creating a surplus of funds after correction. If this understanding is incorrect, I would appreciate clarification or correction.

I would think it would extend to all service providers too. It all comes down to a simple premise. If a mistake is made, whatever benefits the participant the most, that is a safe choice. They should not bear the risk of loss, of any kind, in case of an error to act on their instruction.

I would appreciate hearing other opinions/approaches.

[Guest RK Matta]

I am putting together an outline and discussion for a PLI conference at which I will be discussing error correction in the investment process. Any actual examples of such errors (and what was done to correct, if anything) would be appreciated.

[Kirk Maldonado]

RK Mattta:

You might want to consider covering "broken sales" (e.g., that have to be rescinded because of noncompliance with SEC Rule 144 or Section 16). There's precious little discussion of these transactions.

[bzorc]

In my experience, we used the "what happened, what should have happened, what needs to be done to fix it" methodology to correct errors as mentioned above. If the participant came out ahead, the error was allowed to stand, but if was short, the difference was deposited to the participant's account.

A no win situation for the TPA/trustee, a win-win situation for the participant.

[Guest RK Matta]

Kirk Maldonado

Thanks for the suggestion, though it may be getting too far afield for this particular program to go into detail. Sounds like a good article, though.

bzorc

Yours is the usual approach, when it is possible. I wish they were all so easy.

Consider the following (real) scenarios - what do you advise employer to do?

1. Subsequent to a plan merger, TPA is asked to liquidate and transfer target plan assets from 6 mutual funds, put the assets in MM fund so that participants can direct investment among acquiror plan's fund options. TPA forgets one fund for about 10 days, during which time it drops in value $20,000. TPA agrees to "correct", but wants employer to prove that participants would not have suffered the same losses if they'd timely received and invested the money. How does employer respond? (Hint - by agreeing to take responsibility to dispose of plan assets in this manner, TPA probably becomes a fiduciary.)

2. Mutual fund adviser/plan recordkeeper comes to employer and says that mutual fund's net asset value was calculated wrongly one day about 3 weeks ago, affecting plan by $300,000 (less than 1/2%). Hundreds if not thousands of participants moved money in and out of the fund on that day, and may have moved it in and out of dozens of other funds subsequently (or withdrew from the plan), and average affect on any one of them probably was under $25. Recordkeeper (not a fiduciary) "voluntarily" hands over $300,000 (its contract limits its liability). What does the employer do?