Lost earnings rate of return

[cpc0506]

Can anyone provide some guidance here. We are having a discussion in the office as to what constitutes number of days in the denominator when calculating lost earings.

Employee A did not receive a $1000.00 salary deferral contribution to his account that was due 7/1/2014. The deposit is not made until 10/1/2014.

From the Alliance investment statement, the rate of return for the period 7/1 to 9/30/14 was 10%. What would you calculate his lost earnings to be?

There are two schools of thought in our office. First group say his lost earnings would be $100. (1000 x 10% x 92/92)

The second group say $25.20. (1000 x 10% x 92/365).

The language on the Department of Labor website talks about 'annual' or 'annualized' rate of return for lost earnings calculation. How is the calculation affected when the rate of return is per a period less than one year?

[Lou S.]

The fund actually earned 10% for the period in question he should be credited with 10%.

The 10% quarterly rate earned would be ~40% annual rate.

So what you really have is

$1000 x 10% x 92/92 ~ $1000 x 40% x 92/365

Depending on whether you use simple or compound interest or how you annualize the 10% return any amount you determine will be very close on amounts, with a few pennies.

[ESOP Guy]

The point of the lost earnings formula (method) is to make the person as if the error had not happened. No better or worse then if the error had not happened.

So if the money had been deposited on time would he have made $100 or $25.20?

[cpc0506]

That is my question. I think he should have made $100 in the quarter and that is what is due to him.

[ESOP Guy]

That is my question. I think he should have made $100 in the quarter and that is what is due to him.

Here is the thing as long as this fund is one that provides its price everyday you can compute what he would have earned to the penny. You compute how many units he would have bought on the deposit date, add any units bought with dividends during the period. You now know how many units he would have owned. You know today's price. You know the value it should be as of today.

In short this conversation could be over by creating a short spreadsheet.