Distribution Error From DB to DC Plan

My title may not clear, but the situation is thus. I have a situation with a DB covering 2 participants and a corresponding DC Plan. Both plans were terminated in 2019 and distributions due to be completed in 2020. In the DB 415 lump sums were paid to the 2 participants. But  on July 1, 2020 the custodian of the investments transferred $4000 from one of the DB  accounts to one of the 401(k) accounts.  The oversight was discovered Jan 15th and we are trying to correct it. 

Under the regulations for correcting plan defects it tell us to make a correction that would put in the plan(s) in the same situation has the error not occurred. So for the DB Plan, we need to transfer $4000 from the DC Plan back to the DB Plan. We can also calculate the lost earnings on the $4000 for the months in was not in the DB trust. So if the earnings rate in the DB plan was 6% for the year of 2020, an amount equal to 6% x 50% x$4000 =$120 would also have to be deposited back to the DB plan. 

What I don't understand is where must the $120 come from? Can the company make a $120 corporate deposit into the DB Plan to complete the correction for the DB Plan? Then there is the issue of the DC Plan, since it also has an operational defect since it accepted $4,000 it wasn't entitled to receive. Let's say the DC Plan earned 13% for 2020 on the $4000 deposit so it earned 13% x 50% x $4000 or $260.00. Who is the $260 paid to? Can the DC Plan pay the $120 back to the DB Plan and keep the rest? What if the DC Plan had a loss for 2020-- would it return $4,000 less the allocable loss and then have the corporation pay the balance.  I  can't find a good example how to fix this problem. Any insight would be appreciated!

I would look at what the money earned in the DC plan and return the principal and those earnings.  

(Ignoring questions about what the appropriate DB values were and when payouts should have occured.)

11 hours ago, Bird said:

I would look at what the money earned in the DC plan and return the principal and those earnings.  

I think actually under principles applicable to misappropriated trust funds it should be the greater of what would have actually earned in either plan.

13 hours ago, Luke Bailey said:

I think actually under principles applicable to misappropriated trust funds it should be the greater of what would have actually earned in either plan.

That's probably correct; thanks.  I stand corrected.

17 hours ago, Luke Bailey said:

I think actually under principles applicable to misappropriated trust funds it should be the greater of what would have actually earned in either plan.

Luke I think you are correct but that the participant also has to be put in the same position had the error not occurred. So if the DC earnings > DB earnings than you transfer distribution with earning from DC back to DB and your are done. But if DC earnings < DB earnings you transfer distribution and earnings from DC back to DB but plan sponsor makes up difference in lost earnings. Is that you mean?

5 hours ago, Lou S. said:

Is that you mean?

Yes, Lou. Thanks for the clarification.

After digesting these comments I am still confused. I went back to the RP and it is concerned only with the effect on participants. The participant in the DB is not affected by the gain or loss since his benefit is the result of an actuarial computation and not a function of investment return. But the Retirement Trust for the DB Plan is affected, it sustains a loss of earnings that can only be determined by examining the actual return in the DB Trust and compensating the Trust for the lost earnings it would have had but for the oversight. Thus the pension plan Trust MUST receive back the principal amount plus actual earnings lost. This is where the RP lets us down, it is only dealing with corrections that affect a participant.

The DC Plan gained assets it shouldn't have received but that should not affect any DC participant since the principal amount didn't belong there in the first place and didn't adversely affect the actual earnings the DC plan would have had or allocated to participants.

So as I see it, the DC plan returns the principal amount to the DB Plan and I think the Employer or Trustee deposit the lost earnings to the DB Trust. Who gets the gain from the DC Plan is unclear.  I like Lou's comment about the greater of method, but how would it be applied if either trust or both had investment losses? I appreciate all comments, hope there are more to come!