Is rounding by an investment company normal?

[DMcGovern]

Working on a 401(k) plan's trust accounting.  Calendar year plan.  I noticed one participant's balances from 12/31/19 to 1/1/2020 changed.  The safe harbor match source at 12/31/19 was $1.58; at 1/1/2020 it was $0.99.  The Employee Pre-Tax source at 12/31/19 was $1.27; at 1/1/2020 it was $0.65.

When I asked the investment company what happened to the differences, the response was:

"At 12/31/2019, the participant had deminimus balances in various source/fund combinations (for example, 7 cents in American Funds New World R6 fund / Employee Pre-Tax source).  The $1.21 difference comes from these small amounts that were removed from the system at 1/1/2020.    Our understanding is that this essentially amounts to rounding in the recordkeeping system."

I'm not used to money just disappearing from a participant's account.  Others find this "normal"?

[Lou S.]

Can't say it's something I've seen before.

[DMcGovern]

Thanks for the reply, Lou.  I have another participant in this same plan with larger differences (possibly due to larger balances).  It's a large plan, so it's gonna be fun explaining these to the auditors 🤪

 

[duckthing]

2 hours ago, DMcGovern said:

"... Our understanding is that this essentially amounts to rounding in the recordkeeping system."

That's an odd way to phrase an answer. It kind of sounds like whoever asked the question internally at the investment company didn't completely understand the response they got from their systems people.

I have not seen anything like this. At the very least I would look for a bit more info on what they're doing with the amounts they "removed from the system". If these tiny amounts are being returned to the investment company as a service fee, hopefully that's described in their service agreement with the plan and disclosed appropriately.

[DMcGovern]

Good thought, @duckthing  I'll see if I can get more details and review the service agreement

[Bill Presson]

Sounds like Peter Gibbons explaining what is happening.

[Nood1e]

I worked for the American Funds for 14 years in a retirement plans management role, and find this "explanation" to be pure B.S.

[BG5150]

Maybe those cents are into the fourth or fight decimal place of the fund price?

Can't sell 0.0001 share.

Just spit-balling.

[Nood1e]

It's probably because the funds aren't priced at the beginning of the day, but at the end. With January 1 being a holiday, the 1/1/2020 listed balance is actually the balance at market close on 1/2/2020, which would only match the 12/31/2019 balance if the underlying instruments didn't change in value at all from 12/31 to 1/2 - very unlikely.

[Bob the Swimmer]

Agreed---de minimis is also misspelled

[DMcGovern]

Thank you all for your responses!  I looked at another plan we have with this investment company and found a couple similar discrepancies.  The smaller discrepancies are the same as my original post - participants with low balances and their system is removing what they refer to as "de minimis amounts".  However, I also found several participants that had corrections done that they backdated.  This is another thing I have never seen before.  Examples:  correcting deposits to the wrong source; correcting deposits to the wrong participant.  One was a correction to a correction the investment company processed incorrectly.  In each situation the participant lost money in the transactions.  Again, not a big amount, but $5 here, $8 there.....it adds up after a while.

I have asked for details on the transactions, will see what they provide.  But in the meantime, do you have investment companies that backdate things like this?

Thanks again

[BG5150]

If there are any losses in these corrections, it is up to the plan administrator to make the participants whole.  If it was the investment company's fault or the TPA's fault, it is still incumbent on the plan administrator to pay for the losses--it wasn't the participant's fault.  Then it's up tot he PA to seek relieve from the offending party.