Corrective allocations a fiduciary issue?

[Guest]

Company A changes from a quarterly balance forward method of accounting to daily recordkeeping. During the blackout, like funds were used. Of 800 participants, about 100 did not have their balances put in the proper like funds. Some made money, some lost. The new recordkeeper wants to correct by puting everyone where they should have been when the error was discovered. This involves taking money away from some and reallocating. Does anyone see a fiduciary issue removing money from the account balances of those who were unjustly enriched. I don't, but thought I would ask.

[Jon Chambers]

In situations like this that I've been involved with, the company generally gives employees that came out ahead the benefit of the doubt, and doesn't reduce their funds, while making whole those employees that lost money due to the misallocation. I'm not saying that this is required, it's just what I've seen done, and seems to meet a common sense test.

[Kirk Maldonado]

I don't think that employees have a right to keep money that they weren't entitled to receive in the first place; so that reallocation should be permissible.

[bzorc]

I agree with Jon. In my dealings, I never was allowed (by the client) to take money away from a participant, but was always required to make participant's whole if they were shorted by an error. A lose/lose situation for the TPA.

[R. Butler]

I agree with Kirk. We have several plans with daily allocations. Unfortunately errors will happen occassionally. The recordkeeper always goes back and corrects as of the date of the error. We have researched this issue and have not found anything that prevents the recordkeeper from correcting in this manner.

[Erik Read]

Are we talking apples and oranges here? The original questions states that the "funds" were not "mapped" correctly, not that the participants were shorted assets.

My question would be, are we talking about gains/loses for fund performance, or did the recordkeeper actually allocate assets incorrectly? I agree that if a participant was shorted assets in the original allocation they should be made whole. If the issue is that the funds were miss mapped, so participants didn't recieve correct gains for a period of time, that can be corrected with a reallocation and adjusting the balance for those participants.

I don't see an issues with fixing those accounts, it shouldn't have an effect on the other participants. In this case the recordkeeper wouldn't be move money from one to another - they would "refund" the difference in gains/loses.

Any one see my point in all this? I hope so.

[Jon Chambers]

OK, let me take a slightly different tack. Recordkeeper mis-maps assets during transition, but all participants come out ahead, because each "wrong" fund outperforms each "right" fund. Would anyone argue that the recordkeeper, plan sponsor, or some other party is entitled to the excess earnings on plan assets attributable to the improper mapping? I doubt it.

Second illustration. Some participants come out ahead, some lose. Net, the plan is ahead. I'll ask the question again, would anyone argue that the recordkeeper, plan sponsor, or some other party is entitled to the net excess earnings. If not, should the net excess earnings be allocated pro rata to everyone, or should they be retained by the participants that came out ahead initially.

Bottom line is that (particularly when the blackout has been lifted and participants know where they are), there is a belief that participants have "earned" investment returns attributable to a mis-mapping, because their accounts were subject to the risk implicit in the investment vehicle. However, participants who lost out on the mis-mapping believe that they should be made whole. Like it or not, this perception exists. Sponsors that take away earnings from some participants to fund other losses incurred by other participants, because they were earnings that "shouldn't" have been earned, face potentially huge employee relations issues. If the sponsor can make these adjustments before the blackout is lifted, it may be possible to avoid the issue, since the participants won't know about the mis-mapping. But once the blackout has been lifted, tread very carefully.

[R. Butler]

My understanding is that the initial question asks whether or not it a breach of fiduciary duty to correct a mapping mistake as of the date the mistake occured, even though some participants may have benefitted by the mistake. I have not found anything in the law the suggests there is a breach of fiduciary duty in that situation.

Although I do understand Jon's concerns, it does not change the answer to the question. Also, Jon does not consider that the plan sponsor may not have an option in chosing the correction method. The party responsible for making the correction will likely choose the least expensive permissable option.

[Jon Chambers]

R. Butler is correct on the fiduciary question. My discussion attempted to discuss the practical implications of a decision to take earnings away from a participant, once those earnings had been communicated.

I still believe that the sponsor has primary control over the correction method. The recordkeeper that made the mapping error in the first place may not be willing to come up with the funds for the "adjust up only" correction, but if the sponsor provides the funds, in my experience, most recordkeepers will do the necessary administrative work. Remember, the sponsor controls the plan, while the recordkeeper merely performs administrative functions on the sponsor's behalf.