Expenses and Daily Trades

[Guest Richard Scheer]

I have a Plan with daily trades where each participant is charged a $20.00 quarterly fee on the last day of each quarter. The $20.00 is prorated among the different funds owned at the time. How do I handle a participant who decides to move all of hos money from one fund to another on the same day as the quarterly fee? Should I disallow trades on the last day of each quarter? We are currenlt using the Quantech system if this helps.

Thanks for any information

[Guest Robin Davis]

Would it be possible for your to still prorate it among the two funds? In the case of transfer enmasse from Fund A to Fund B, reduce the amount in Fund A by $10 prior to the transfer and the amount transferred into Fund B by $10 after the transfer.

Just a thought.

------------------

Robin Davis

D&D Benefits, L.L.C.

972-755-3327

[bzorc]

I would generate the trade for the $20 fee before the transfer is generated. Then the transfer is net of the fee.

[Guest Richard Scheer]

Are you suggesting that I post the $20.00 fee charge on day 1 and then wait until that transaction is confirmed before posting the trade (wait until day 2)?

In order to execute the trade, I need to know how many shares the participant has in his account. This information will not be available until after the $20.00 fee charge has cleared.

[Guest]

This problem you are describing is not necessarily a Quantech issue. This has been an age old problem since I starte doing daily processing back in 1985 at Nationwide and our own in-house recordkeeping system.

The problem stems from the fact that there is enough money in the mutual fund to cover both the transfer and the fee, but the fact that both transactions will cause more than 100% of the participant's share balance in a particular fund to be liquidated, it drives the participant to a negative balance.

The same problem can also occur if you are liquidating 100% of a participant's account due to a distribution.

I recommend that you do not process transfers or distributions on the date that you are processing the fee. This should be communicated to the participants and plan sponsor. I have handled it this way for a number of years and I have not had any recourse from it. It just becomes a standard part of your administrative guidelines.

I think it becomes very complicated trying to "time" when everything will clear in the participant's account so you can process the fee and the transfer together. So, by not processing transfers on a particular day, you should not run into this problem.

------------------

Carol J. Ringwald

Senior Consultant

Shawmut Consulting Assoc.

[Guest Richard Scheer]

Thanks Carol

That is the way I handled the situation and was wondering if there was any other alternative.

[bzorc]

I agree with Carol's suggestion, it makes things nice and clean. However, with as much market volitility that there is today, do you see a problem holding a person out of a transfer or a distribution for a day when the market takes a 5% swing? Are there liability issues? In my experience, I have been burned and held liable (by clients)for gains not received by holding a person out of a transfer for a day, and the market makes a significant change.

[Guest Richard Scheer]

I agree that with the market moving by 3-5% a day this could be a problem, but I do not see any other alternative.

Since the fees are only allocated four times a year, there are only four days when a participant cannot make a trade.

Reagarding liability, I feel that if this is communicated to the Plan Sponsor and the employees, we will be fine.

[This message has been edited by Richard Scheer (edited 01-11-2000).]

[John A]

bzorc, why did your firm have to pay? Was it a court order? Did your firm pay in order to retain the client? Have you had situations in which the participant avoided a large loss due to the 1-day delay?

[bzorc]

Sorry to be a downer, but this was communicated to a client of mine, and to their employees. We posted an expense, and waited to the next day to post a transfer. Market swing cost the participant $1,500. Even though communicated to, agreed upon and understood by the employees, our firm had to pay!

[Guest Richard Scheer]

Then what is your solution??

By the way, who did you pay? the client, the participant, or the fund? (just curious)

[bzorc]

To answer the questions posed after my posting: The solution is to post two trades, as I mentioned earlier. It takes a lot of manual fudging to accomplish this, but allowed the person both an expense transaction and the transfer. Second, the participant was paid for the error. A check for the lost earnings was cut to the trustee, and additional shares of the fund that the person transferred to were purchased. Third, the firm paid strictly for client retention (my recommendation was not to pay the money). And finally, if the person avoided a loss because of a timing issue like this, the participant simply was allowed the benefit. The best of both worlds for the client and their employees, and the worst (financially and PRwise) for the recordkeeper. A major reason I got out of daily recordkeeping and back into consulting (for small clients and plans) about 6 months ago!!!!!

[Guest Richard Scheer]

Correct me if I'm wrong, but if the Trustee put the $1,500.00 into the Plan on behalf of the participant, I believe a contribution has been made.

How did you get around this problem?

By the way, we will take the position that no trades can be made on the day that expenses are allocated.

[bzorc]

The trustee did not put the money into the plan, our firm did. I agree it looks like a contribution, but it was explained and document as an "earnings correction", which passed muster with the auditors on the plan.

I have also had the client put the money into the plan to cover the shortfall, have the transaction described as above, and a future invoice reduced.

You are correct in taking your position. It is one I wish my former firm had taken!

[This message has been edited by bzorc (edited 01-13-2000).]

[John A]

How about this:

For transfers, process the transfer first, and process the fee the next day.

For distributions, process the fee first, and then process the distribution the next day.

What are the pitfalls with this approach?

[Guest Richard Scheer]

The only problem with that scenario is that I have to post the expenses for all participants on the same day and there will never be a day where there are no trades. There are about 1,800 participants in this Plan.

[Guest]

It makes sense that you could process the fee after the transfer or distribution, except that in many cases, the fees are being allocated to all participants on a pro-rata basis, so there is typically no way to not include one of these participants in the allocation...and you really would not want to.

The ultimate solution is to have the recordkeeping systems provide for a hierarchy to process transactions in a specific order. However, I doubt that the recordkeeping systems will make these types of changes...it's a significant change and would require lots of programming.

I think it is unfortunate that the company paid the $1500 loss, especially since you had a policy in place that indicated your procedure. But, I do understand the business decision involved...it may have been worth it to pay the $1500 to save the business. Unfortunately, it sets a precedent for the plan and future potential losses.

However, I would still stick with the procedure of not processing the fee on the day of transfer and distributions. It's the cleanest and unless you have lots of problems with participants requesting lots of exchanges on the same day and significant losses.

------------------

Carol J. Ringwald

Senior Consultant

Shawmut Consulting Assoc.