Allocating Gains Loss on Pooled Accounts

[Karoline Curran]

CPA has a plan with Morgan Stanley-- 401k/PS pooled account. He's allocating earnings based on salary (individual salary/total salary * gains/losses).  This gives someone who is eligible, but not participating,  a share of the gains/loss. Is this correct?

[Bill Presson]

You have to look at what the plan says and I'm pretty confident this won't be it.

[Karoline Curran]

3 minutes ago, Bill Presson said:

You have to look at what the plan says and I'm pretty confident this won't be it.

It's not one of my TPA's plans-- he's just asking. I told him it should be done based on  beg balances-- why would you give someone gains/loss when they have no balance?

[Kevin C]

I'll go a stronger and say no, it disqualifies the plan.  The plan document should have language saying how the gain/losses are allocated.  The formula used also means that terminated participants with balances do not get an allocation of gains/losses. 

[Kevin C]

To add some detail to my post above:

1)  1.411(a)-11(c)(2)(I) says that participant consent to a distribution is not valid if a significant detriment is imposed on a participant who does not consent to a distribution.  Receiving no investment gains for years after the year you terminate employment is a very significant detriment. So, any distribution of a balance over the cashout limit is being paid without a valid participant consent.

2) The plan document should have language saying how investment gains/losses are allocated.  Even if it only says a reasonable method will be used, I don't see how allocating investment income based on compensation could possibly be considered reasonable.  The only guidance I can find on reasonable allocation methods for something similar is FAB 2003-3.  In part, it says "On the other hand, where fees or charges to the plan are determined on the basis of account balances, such as investment management fees, a per capita method of allocating such expenses among all participants would appear arbitrary. "  Investment income in a pooled account is produced by the account as a whole, so it would be a very similar case to a fee determined based on the account balance.  Allocating based on current year compensation would be at least as arbitrary as allocating per capita.   I think the allocation method being used would be an operational failure as well as a fiduciary breach.

3)  1.401(a)(4)-1(c)(8) requires that the allocation of investment income be nondiscriminatory.  Depending on the circumstances, this could also be a qualification problem.

 

[RatherBeGolfing]

2 hours ago, Karoline Curran said:

It's not one of my TPA's plans-- he's just asking. I told him it should be done based on  beg balances-- why would you give someone gains/loss when they have no balance?

There are plenty of ways to do it other than just beginning balance, but pro rata by comp ain't it...

 

[Lou S.]

To add to what others have said, that's no way to allocate gain/(loss).

It sounds like a perfectly reasonable way to allocate contributions to  the plan, assuming that's the formula in the Plan Document, but not gains/(losses).

[Bird]

4 hours ago, Bill Presson said:

I'm pretty confident this won't be it.

Lol

4 hours ago, Karoline Curran said:

CPA has a plan

That tells us all we need to know.  I'll bet it's the tip of an iceberg.

[Karoline Curran]

The CPA doesn't literally have a plan -- he has a client with a PS plan and he's allocating the earnings/losses for them.  Thanks everyone!!

[BG5150]

Ask him why he is doing it that way, and why he would think that's acceptable.

How could an eligible participant who's never had a contribution (deferral or PS or whatever) all of a sudden now have an account b/c the trust had a gain?

Are you sure he's not trying to allocate a Profit Sharing?

And, tip of the iceberg, indeed.  If this is how he allocates earnings, I don't wanna know how the rest of the plan is being run...

[Mike Preston]

I do. Sounds like great fun. 

[ESOP Guy]

28 minutes ago, Mike Preston said:

I do. Sounds like great fun. 

Until you have to do the takeover work!  

[justanotheradmin]

This whole little thread is hilarious. :-) 

This line is my favorite. 

On 3/1/2019 at 9:58 AM, RatherBeGolfing said:

There are plenty of ways to do it other than just beginning balance, but pro rata by comp ain't it...