pooled plan added immediate payouts... with expected results

We have a pooled plan that had the standard 'after the end of year valuation is completed', but the plan sponsor wanted to be nicer to the participants, so over our objections amended the plan to allow for immediate distributions.

Here we are, just getting the data for 2020, and there's a 2021 terminee who is demanding a payout Right Now because that is what the plan allows.  And she doesn't want to wait the couple of weeks until we get 2020 done.  Our first instinct was to go with the 12/31/19 balance and pay that out and deal with any residual later, but then maybe a percentage of that is better in case there's a loss in 2020 (OK, there probably isn't, but we're setting precedence and administrative policy here).  The timing makes this extreme, but I suppose this really goes for any distribution request we're going to encounter once the next plan year is completed.  Any thoughts or guidance or best practices out there that we can be following on this?  Besides being better at saying "no" to our clients?   Thanks.

What does the document actually say? Most say something like "as soon as administratively feasible" following termination of employment. So if it's not administratively feasible to pay her until the 2020 is done, then tell the employer to tell her to wait. Someone has to be willing to take a little heat here and not cave.

I agree with Bill Presson.  Not only should there be some "administratively feasible" language but point the participant (and the client) to the claims procedure in the SPD...it should say something about 90 days, and then another 90 days if the plan says so.  A shrug of the shoulders and a "so sue me (the sponsor)" is all you/they can do really.  We deal with participants directly a lot but of course there's a point where you explain that the plan sponsor is the Plan Administrator and you're cutting off direct communication because you don't get paid enough for the agg.  If the client is the one badgering you then you explain it to them as you did to us and offer to pay out a reduced amount and then the balance, for two fees.

Back in the day when we did a lot of annual valuation pooled plans with institutional trustees (banks, trust companies), the trustees had the plan administrators adopt a policy of paying 70% or 80% of the prior valuation balance, with the remainder after the end of the current plan year.  Plan document had the "as soon as administratively feasible" stuff.  Some participants took that partial distribution, others didn't and just waited for a single distribution.  Maybe an administrative policy would still work?

40 minutes ago, chc93 said:

Back in the day when we did a lot of annual valuation pooled plans with institutional trustees (banks, trust companies), the trustees had the plan administrators adopt a policy of paying 70% or 80% of the prior valuation balance, with the remainder after the end of the current plan year.  Plan document had the "as soon as administratively feasible" stuff.  Some participants took that partial distribution, others didn't and just waited for a single distribution.  Maybe an administrative policy would still work?

In cases like that, does teh plan allow for partial withdrawals at termination?  Most of the plans I deal with are all or nothing before retirement age.

20 minutes ago, BG5150 said:

In cases like that, does teh plan allow for partial withdrawals at termination?  Most of the plans I deal with are all or nothing before retirement age.

I forget how that worked back then.  Maybe a distribution request for the total account balance, but administratively paying only a partial first, satisfied the requirement of all or nothing?  As opposed to a distribution request for a "real" partial distribution... which might not be allowed.

Over the long term they need to work this out and watch this pay now.  Back in the day I used to do a lot of balance forward PSPs.   I remember in 2008 we worked on a plan for a large hospital.   In late 2008 some doctor figured out he could ask for a distribution based on the 12/31/2007 balance.  He figured that is a great deal given what the market was doing.  He must have told his buddies as there was a run on the bank. 

The hospital had to quickly amend the plan to make people take partial payments based on the prior 12/31 and a true up after the next valuation.  

It might be sad but people will try to use these kinds of provisions to game the system if they can.  

On 10/1/2021 at 3:35 PM, BG5150 said:

In cases like that, does teh plan allow for partial withdrawals at termination?

I think if it is taken in one year it isn't considered a partial withdrawal.

The employer really needs to change the provision to say that the participant gets paid out as soon as administratively feasible following the first valuation after the date of their termination of employment. Otherwise they're setting themselves up for potentially serious hurt at some point in the future when there will be an unfortunate market swing right around the date of an individual's termination.

411d6 is an issue.

10 hours ago, Luke Bailey said:

The employer really needs to change the provision to say that the participant gets paid out as soon as administratively feasible following the first valuation after the date of their termination of employment. Otherwise they're setting themselves up for potentially serious hurt at some point in the future when there will be an unfortunate market swing right around the date of an individual's termination.

I agree with Mike, that would be a cutback.  However, the trustees have, or should have, the ability to declare a special valuation date at any time in order to protect the (other) participants' interests.

1 hour ago, Bird said:

I agree with Mike, that would be a cutback.  However, the trustees have, or should have, the ability to declare a special valuation date at any time in order to protect the (other) participants' interests.

But if you re-value for one, don't you need to do that every time someone asks for a distribution mid-year?

That could get costly.

19 hours ago, Mike Preston said:

411d6 is an issue.

It is an issue. My recollection is that there was litigation about this very issue after the 1987 market meltdown, and at least one case in 9th circuit said it was not a cutback, but I would need to research. May have been cases both way, and may depend to some extent on plan language. As Bird indicated, language permitting special valuations should always be included in a pooled plan, and yes, everyone has to be treated the same. My suggested provision paying out only after, and on basis, of next valuation was a suggestion for going foward. But you really need both a forward-looking valuation and a provision for special valuations, in case there is  extreme market volatility between the date of the valuation and the time you can pay out the participant, which can happen even with forward-looking valuations.

10 hours ago, Luke Bailey said:

everyone has to be treated the same

@Luke BaileyI'd offer a different interpretation, and say that you don't necessarily need to treat every participant the same, but you do have to treat reasonably similar circumstances the same.  In other words, if you do an interim valuation for Joe due to a market decline of 10% from the last valuation, you don't necessarily have to do it for Jane when the market is up 2% from the last valuation.  I'd put a policy in place that dictates when an interim valuation will be done.  The policy would depend on the plan, in a small plan, you might have so few participants that you could do an interim valuation for each termination, but in a bigger plan, it might be triggered gains or losses that exceed a certain threshold.

We have a small plan that put a policy in place last year that called for an interim valuation with the valuation date being the last day of the month following a distribution request.  This was done to allow sufficient time time for the valuation to take place, and so that there was always at least a month between the request and the valuation date, making it impossible to strategically request a distribution due to a sudden shift in the market.

20 hours ago, BG5150 said:

But if you re-value for one, don't you need to do that every time someone asks for a distribution mid-year?

Not necessarily; see RBG's response.  

1 hour ago, RatherBeGolfing said:

due to a market decline of 10% from the last valuation

A decline in the market, or plan assets?  They don't always move in the same direction.

Also, could be problematic if there are assets in the plan for which valuations aren't readily available.

16 hours ago, RatherBeGolfing said:

'd offer a different interpretation, and say that you don't necessarily need to treat every participant the same, but you do have to treat reasonably similar circumstances the same.  In other words, if you do an interim valuation for Joe due to a market decline of 10% from the last valuation, you don't necessarily have to do it for Jane when the market is up 2% from the last valuation.  I'd put a policy in place that dictates when an interim valuation will be done.  The policy would depend on the plan, in a small plan, you might have so few participants that you could do an interim valuation for each termination, but in a bigger plan, it might be triggered gains or losses that exceed a certain threshold.

Totally agree, RBG. I meant you have to treat everyone the same who gets cashed out at around the same time.

15 hours ago, BG5150 said:

A decline in the market, or plan assets?  They don't always move in the same direction.

Sure. If the stock market tanks but the plan is in short-term treasuries, you would probably not need to do a valuation, BG5150.

15 hours ago, BG5150 said:

Also, could be problematic if there are assets in the plan for which valuations aren't readily available.

If the plan has nontraded assets, you must value at least once per year. In that case, you should cash people out only after end of year, when you have the valuation. I have had investment company clients with lots of untraded assets in partially pooled part of plan (for employer contributions), but they usually have quarterly valuations, usually finished months after the end of the quarter.