Interim Valuation Procedure

[chris]

Anyone have any ideas as to what to include in an interim valuation procedure? Profit sharing plan has an Anniversary date of 9/30. Participant(HCE) terminated employment as of 9/30. Participant wants distribution of her account as soon as possible. Value of participant's account now is about 70% of what the value was on 9/30. I think there is a recent case regarding plan trustee's obligation to do an interim valuation in such a case. I need to draft the interim valuation procedure such that discrimination will not be an issue(e.g., later on, if DOW goes up, a terminated participant could get account valued under the interim valuation procedure to the detriment of remaining plan participants). Initial thought is to tie it to fluctuations in the DOW and have it apply to all distributions without pegging it to distributions of a certain size. I understand that the interim valuation procedure can cut both ways. I appreciate any comments... Thanks.

[Guest boberlander]

Does your plan document allow for interim valuations? I would not perform one if it not allowed for under the terms of the plan.

You seem to indicate that there will now be a valuation of accounts at the time of every distribution. Is that really what you want? Or, do you just wish to change procedures to stick it to this one ex-employee?

[chris]

Brian,

The plan document does allow for interim valuations.

The objective is to minimize the loss to the remaining plan participants which would otherwise occur if the terminated participant receives the distribution based on the 9/30 valuation. There's no ill-will on the part of the trustees or the employer. The issue is how to put an interim valuation procedure in place which will minimize the loss while at the same time not be overly burdensome going forward. For example, ".....for distribution purposes, accounts will be revalued if the DJIA increases/decreases 500 points in any given plan year quarter...." I know there's more to it than that, but just as an example. Thanks for your response.

[Guest boberlander]

Okay - I don't mean to impugn anyone's motives, just to speak to basic fairness (even if it is for an HCE with a large account balance).

My feeling is still that the interim valuation practice will be in response to this one situation. This participant, and others, has benefitted or not benefitted based upon previous distributions.

Why shouldn't prior practice be continued? Why not fix it on a go-forward basis, after informing all of the participants of the change in procedure. How about instituting quarterly, or monthly, valuations?

[chris]

I understand your general point regarding fairness and participants' benefitting, or not benefitting, from the prior annual valuation procedure. However, it seems that since the very nature of an interim valuation procedure is to address the fairness issue (on a smaller scale) as it relates to a large gain or loss which occurs between the annual valuation date and the date of distribution, that is an appropriate alternative in this situation. Also, I don't know that the plan sponsor wants to go on the hook for monthly or quarterly valuations. The plan sponsor solely wants to minimize the loss to the plan which would occur in this situation and in future similar situations.

[Wessex]

I don't think you can do interim valuations only if there has been a loss; they must also be done when there has been a gain. Otherwise, it seems to me that this would be employer or trustee discretion as to the amount of a participant's benefit, not to mention the basic unfairness of adjusting for losses only. Every interim valuation procedure that I have seen has been triggered by a specified percentage change in the value of the trust assets.

This issue comes up every time there are large changes in market values. It appears that this document provides for interim valuations, but does not specify what triggers an interim value, and that no interim valuations have previously been performed. I dare say there have been a number of large gains over the past few years where terminated plan participants got shafted and active participants got windfalls. (The natural result of annual valuations during a bull market.) Presumably there is a significant amount of money at stake, else there wouldn't be talk of interim valuations. I know if I were this participant, I wouldn't accept the losses without a fight!

[chris]

The interim valuation would not only be done in loss situations. An interim valuation would be done when there is a significant change in the value of the trust assets, up or down. The issue is how broad or how narrow the procedure requiring an interim valuation should be. As to the participants affected as a result of performing an interim valuation, you will always have participants who will be affected, plus or minus. I guess what I am trying to say is that any time you institute a different procedure someone will be affected whether it be positively or negatively.