What is your policy on the treatment of excess cash created from corre

[John A]

What is your policy on the treatment of excess cash created from corrective trading? Should it be given to the participants involved in the correction? Should it be moved to the forfeiture acct? Should an allocation be done across all participants?

To clarify, excess cash created from corrective trading for this question means: If a purchase trade is placed in error (for example, a mistake is made and a contribution is traded without funding, so the trades are reversed), depending on the market swing there can be a gain when the shares are sold back. Also, when a corrective trade is made and it is necessary to buy a certain number of shares, since buys can only be in dollars, estimation can lead to excess shares, and when those excess shares are sold back, and depending on the market, there can be a gain there as well.

[Guest]

First, I try not to trade actual shares, if at all possible. If you are making a correcting trade, I always suggest using a dollar amount. I believe that this is fine because you are allocating based on price last computed which is last night's price. Otherwise, it's like chasing a never ending trail. Also, the mutual funds typically do not like doing buy trades in shares...you've got to come up with the correct amount, or send more, based upon what you think the market will do.

Let's look at an example. If I trade a $10,000 contribution on 2/5 and I find out on 2/7 that the price the mutual fund gave me was incorrect, I leave the 2/5 trade just as is. Then, in a spreadsheet, I calculate what really should have happened, using the correct price for 2/5. I calculate the difference in dollars. Then, in tonight's trade file, 2/7, I place a dollar trade for the difference and show it as a gain or loss, depending on the circumstances. If the trade on 2/5 resulted in more shares being purchased, I still need to make an adjustment because the mutual fund company will make a correcting trade and then I will not have the correct amount. When I reconcile the account positions at the end of the day, if there is a share amount difference after making the correction, I may have to allocate the share difference to the participants, again using a current date and not creating an actual trade.

I have found this to be the most effective way of handling corrections and I've done it this way since the mid-80's with no problems. Let me know your thoughts or concerns. You can also reach me via email at carol@cjrconsulting.com

Thanks.

[Erik Read]

Carol - what do you do then in the event (as sometimes happens with Mutual Funds) they change a price for a date a month or more after the fact? I can think of at least three fund families that are notorius for changing prices more than two weeks in the past. One such change was actually almost 90 days after the fact.

[Guest]

Erik, basically I did the same process. I calculated the difference based on what should have happened and what did happen. Unfortunately, this really cannot be done effectively inside most recordkeeping systems that do share accounting. It's a much easier fix for recordkeeping systems that are doing unit accounting (such as at Nationwide), but that's another story for another day.

I calculate by participant what the difference is and the affect it has on their account. If the participant has terminated and their account balance has been paid out, then a second payout may be necessary. Administratively, we set a dollar limit for this...if the amount of the second distribution is greater than the amount of the fee we charge to do the processing, then we would allocate the amount to the participant and process a second distribution, minus our fee. If the amount is less than the amount of the distribution fee, then we allocate the difference to the remaining participants, since the money belongs to the plan.

A separate gain or loss is allocated to each participant, as necessary to update their account.

Each situation has to be looked at differently. However, you should create a set of guidelines on how you should handle corrections that is a standard used in most situations. Also, I highly recommend that corrections only be done by one or two persons in the firm who are very familiar with the trading process and the recordkeeping system. I've seen too many times where corrections were done incorrectly and now we're correcting the corrections!