Retirement Distribution

[jim241]

A participant owns 50% of the company and recently retired. The participant wants to take a full distribution.  Per the most recent annual report, the account balance is about 44% of the total plan assets.  I'm concerned that a full distribution from the pooled account might affect the rest of the participants’ account balances negatively. Any concerns or issues with allowing the distribution? Thanks in advance. 

[Madison71]

What does the doc say about valuations and ability for special valuations?  Is plan annually valued

[jim241]

The plan is annually valued and allows for special valuations in extraordinary circumstances. 

[Madison71]

There is typically language about a special valuation date where you could do a valuation prior to  distributing out if concerned that there are significant losses and expenses during the year that will be absorbed by the other participants.  There would be no discrimination issues with owner sharing in those losses by doing a special valuation.  However, there shouldn't be an issue distributing without doing this valuation if permitted by the plan - you just may have some upset participants asking a lot of questions post val. 

[jim241]

Thanks for the insight. Nothing wrong with allowing this distribution if it may reduce the value of the remaining participant's accounts? 

[Belgarath]

I respectfully disagree if I'm understanding what you are saying - the fact that the plan PERMITS it doesn't necessarily mean it is ok. IMHO, it would be a gross breach of Fiduciary duty to allow full distribution of a 12/31/17 account value if there has been a big loss in a pooled account plan.

To illustrate by way of an absurd example, suppose 12/31/17 total plan assets are 1 million. The share attributable to the owner/Highly Comp/probably Fiduciary is $400,000. Current total asset value due to big losses is $420,000. Do you think it is ok to give the Honcho a $400,000 distribution? I don't.

[jim241]

4 minutes ago, Belgarath said:

I respectfully disagree if I'm understanding what you are saying - the fact that the plan PERMITS it doesn't necessarily mean it is ok. IMHO, it would be a gross breach of Fiduciary duty to allow full distribution of a 12/31/17 account value if there has been a big loss in a pooled account plan.

To illustrate by way of an absurd example, suppose 12/31/17 total plan assets are 1 million. The share attributable to the owner/Highly Comp/probably Fiduciary is $400,000. Current total asset value due to big losses is $420,000. Do you think it is ok to give the Honcho a $400,000 distribution? I don't.

I agree. My question doesn't necessarily involve the interim valuation. My concern is if the owner who has more than 44% of the total assets in the plan receives a distribution it will significantly impact the value of the other participants accounts. Is there anything that says that the distribution shouldn't be done or other information regarding this? 

[Belgarath]

Now I'm confused. Why will it significantly affect the assets of the other participants? If the total assets are now $420,000 and his share is 44% (or 184,800) and he receives a distribution of $184,800, how does this diminish the value of the accounts of the other participants? Their accounts should still hold the same number of shares as on 12/31/17, (albeit that they are currently worth much less per share) and when 12/31/2018 rolls around, their share value should be the same as whether this distribution took place or not. It'll be up or down depending upon the total performance for the year. Maybe I'm just missing something.

[ESOP Guy]

27 minutes ago, jim241 said:

I agree. My question doesn't necessarily involve the interim valuation. My concern is if the owner who has more than 44% of the total assets in the plan receives a distribution it will significantly impact the value of the other participants accounts. Is there anything that says that the distribution shouldn't be done or other information regarding this? 

I guess I am at a loss for how the others in the plan suffer any kind of loss once an interim valuation is done.

Are there assets in the plan that are illiquid that could cost a lot to sell or have to be sold at fire sale prices? 

(I see Begarath is asking the same question as I write this) 

[Tom Poje]

I'm guessing the idea might be:

to invest in pooled fund A it takes at least 500,000. this particular fund has always had returns twice that of fund B

but once the large distribution takes place, the remaining assets will have to be invested in pooled fund B.

I think the answer is "That's life". if someone pulls out a large sum (even with an interim val) then yes the others may end up in an asset account that is not necessarily as profitable in the long wrong.

[jim241]

If a participant has 44% of the assets and leaves the pooled account, the assets have to be liquidated in order to satisfy the distribution. That leaves the other participants with 44% less and now impacts the value of their accounts. I know the impact wouldn't take place until the annual valuation - but nonetheless their asset value has significantly dropped. 

[Tom Poje]

I'd hold as long as an interim val is done, it 'indirectly' effects the other participants depending on if this requires an asset reallocation. they don't have 44% less. they never had that portion of the pooled assets.

but if there has been a significant drop in value due to stock market you have to do an interim val.

a better extreme example that what was given, let's say the person had a balance of 900,000 and assets were 1,000,000 at 1/1.

today the assets are worth only 850,000. does the company have to kick in another 50,000 so the person can be paid because he terminated? no you would interim val and prorate the assets.

but after all is said and done the other participants still have the same % as they did before(when you take into consideration you are excluding the person distributed.

 

[Bird]

1 hour ago, jim241 said:

I agree. My question doesn't necessarily involve the interim valuation. My concern is if the owner who has more than 44% of the total assets in the plan receives a distribution it will significantly impact the value of the other participants accounts. Is there anything that says that the distribution shouldn't be done or other information regarding this? 

I am totally confused.  Answers to this post seemed to assume an interim val was being done but I don't see anything that says or implies that is the case. 

I would probably recommend an interim val whenever someone is taking 44% of plan assets.  Unless I knew about it ahead of time and then we would generally recommend moving the estimated distribution amount into cash before the year-end valuation, so that part of the account would not be subject to fluctuations.

[jim241]

7 minutes ago, Bird said:

I am totally confused.  Answers to this post seemed to assume an interim val was being done but I don't see anything that says or implies that is the case. 

I would probably recommend an interim val whenever someone is taking 44% of plan assets.  Unless I knew about it ahead of time and then we would generally recommend moving the estimated distribution amount into cash before the year-end valuation, so that part of the account would not be subject to fluctuations.

No interim valuation is being done. My original question is, there is pooled 401k and a retired participant who has 44% of the total account assets is requesting a distribution in a lump-sum. My concern is the impact on the other participants and if the distribution should be allowed. 

[Belgarath]

Ah - then I go back to my first post. NOOOOO - IMHO it shouldn't be allowed. Only allowable if you do an interim valuation.

[ESOP Guy]

26 minutes ago, jim241 said:

No interim valuation is being done. My original question is, there is pooled 401k and a retired participant who has 44% of the total account assets is requesting a distribution in a lump-sum. My concern is the impact on the other participants and if the distribution should be allowed. 

The answer to your concern is to do the interim valuation.  Yes, if one isn't done then any earnings/loss is forced on the remaining people.  That is true every year in a balance forward plan with pooled investments.  It is just in most years the amounts aren't material.  I would be very hesitant to allow an ex-owner to put material losses on the rank and file participants. 

That is why people keep telling you to do (or recommend to your client) an interim valuation. 

[chc93]

Back in the day when most plans were pooled trusts, I recall some plan administrators having a policy of a set threshold of something like 20% of the assets for distributions where a special valuation would be done... gain OR loss.

[Patricia Neal Jensen]

Not that it helps in this situation or any like it, but pooled accounts are a set up for problems like this.  Although even in an individually allocated contract, you could have expenses suddenly jump if that much of the contract was paid out at once.  Just to make this more entertaining, the 50% owner in question is undoubtedly a fiduciary to this plan.  Jim241 better not be the only person worried about this.

[Larry Starr]

12 hours ago, Patricia Neal Jensen said:

Not that it helps in this situation or any like it, but pooled accounts are a set up for problems like this.  Although even in an individually allocated contract, you could have expenses suddenly jump if that much of the contract was paid out at once.  Just to make this more entertaining, the 50% owner in question is undoubtedly a fiduciary to this plan.  Jim241 better not be the only person worried about this.

Nonsense; this is not a "problem" when dealing with the underlying question is a normal part of your plan admin. We have hundreds of trustee directed pooled accounts and I firmly believe they are best for participants (but we won't get into that argument here).  We make most distributions based on the prior year end value; distributions for terminated employees are made in the year following termination and after the valuation for the year of termination is done.

We suggest an interim valuation in two circumstances: 1) if the amount being paid out is a substantial dollar amount or a substantial percentage of the plan assets (and yes, 44% would qualify); or 2) there has been a substantial change in the underlying value of the assets (up or down).  The interim val is done AFTER the distribution forms are returned and payment is now appropriate; our interims are usually done and payment made within a couple of days of the interim val.

No problem; just one many routine things we have to do to administer plans.

In this case, if there has not been a significant change in the underlying assets (and at this point, the S&P 500 from 1/1 until yesterday was less than 1% up), if the trustee elected NOT to do an interim, I don't think he would have any problem justifying that (though we would recommend the interim be done based on our recommendation rules above).

[Bird]

19 hours ago, jim241 said:

My original question is, there is pooled 401k and a retired participant who has 44% of the total account assets is requesting a distribution in a lump-sum. My concern is the impact on the other participants and if the distribution should be allowed. 

Probably not...without an interim val.  As discussed above, it depends.  If the assets haven't changed that much, then maybe not.  The first thing I would do is talk to the participant, the trustee and the investment advisor if there is one to make sure everyone knows the implications of this event.  The second thing is to recommend that they move assets into cash, of approximately the amount of the distribution - you're going to need to do that anyway, and this keeps you from chasing your tail after the date of the interim val.  Then plan on a 5/31 interim val.  Eyeball the assets after 5/31, and if not significantly different from 12/31/17, then just use those values (i.e. no interim val).  If different, then do the interim val and process the payout.

[ESOP Guy]

To stress something Larry said I would have the plan adopt an objective test of when to do interim work or not.  The last thing you want to have the plan to be is in a position where in down years you don't do one and a former own gets paid but in up years you are always doing one to the former owner's benefit. 

[Luke Bailey]

I don't think jim241 has yet explained the crucial fact(s) of why the 50% owner's taking a distribution of 44% of the plan's assets will impact the other 56% negatively. Obviously, if the plan is 100% invested in publicly traded stuff, it would not impact the value one iota. We must be dealing with something else, and therein likely lies the tale.

[Bird]

14 hours ago, Luke Bailey said:

I don't think jim241 has yet explained the crucial fact(s) of why the 50% owner's taking a distribution of 44% of the plan's assets will impact the other 56% negatively. Obviously, if the plan is 100% invested in publicly traded stuff, it would not impact the value one iota. We must be dealing with something else, and therein likely lies the tale.

Granted a lot of things in this thread are not clear, but I think we have all assumed that he's taking cash, and if the assets lost 10% and you give him the dollar amount from the last val then everyone else bears his share of that loss.  If you are assuming he will take 44% of each current asset, then I agree, it doesn't impact others.  But that is effectively doing an interim val. 

[Luke Bailey]

Didn't know there were still annual val plans out there. But if we make that assumption, then given the circumstances of the participant's ownership and share of assets, he/she is likely a fiduciary and perhaps responsible for, and more knowledgeable about, the plan's investments. An interim val is likely in order under the circumstances.