401(K) Funny Business
Here's one for you...just did a new client rollover from a 401(K). The former employer paid him out his 12/31/2006 balance and indicates that this is a full distribution. As near as I can tell, they are keeping about $50K in earnings on the plan for the first half of the year!!! Has anyone heard of any way this is legal?!! I told him that it is probably worth asking an attorney about, but I was curious is any of you have ever ran into such a bizarre penalty?
Incidentally, the 401(K) is a pooled plan...one investment pool for all, regardless of risk tolerance or age...another no-no in my book, but I understand the employer has been warned repeatedly about this potential minefield and steadfastly refuses to do anything about it.
Anyone got any wisdom or insight on this one? All help is much appreciated...
With a pooled plan, don't you have to do some serious number crunching when someone leaves to figure out their portion? Maybe the employer didn't want to pay someone to crunch those numbers, so they just used the year end number. I'm not saying that it is right (it's not), but that may be what happened. I would guess your client got screwed out of some cash. Good luck fighting it.
If there is indeed funny business going on with this plan, your client may want to drop a dime to the IRS to get that plan squared away, even if he doesn't work there anymore, just for everyone elses sake.
I had a similar thing happen to an employee retiring from a small grocery store chain. The plan was a pooled plan and was self trusteed. They only did accounting once a year. The client could take the money using the latest accounting (in your case 12-2006) or could wait until the next accounting period.
It wasn't nearly as big of a hit as your guy, but evidently this is not illegal. My guy waited because it was only about 3 months to the next statement period.
Get an ERISA attorney on board. The sponsor/trustee is being shady, and knows that rarely will David take on Goliath. It's like what landlords did to our "security deposit" when we were in college. (That was a long time ago, but I think the analogy fit)
Well, I'm amazed that they can get by with this. Definitely, the guy is vested...was there almost 30 years. Nowhere on the distribution form was he warned that he would take such a hit if he pulled out mid-year. I can't help but think there's some potential liability here. Had the client and I known that they would lose all the earnings, I would have advised them to wait until January and I'm sure he would have done it. A double digit penalty seems almost criminal to me.
Your client would do well to advise his former employer, that if the issue isnt resolved to his satisfaction within a given time frame, he will be contacting the Department of Labor. Having a Labor attorney relay that communication will get the guys attention, and your client will know pretty quickly whether there is funny business going on. Unless the employer really is brainless.
I fully agree w/ Joedbroker & other posters. With 30 years he would have been fully vested under the old & new vesting schedules. Even if this was profit sharing $ or employer match there's no way they should be keeping any of it. The issue here is likely related to the plan only being valued on an annual basis by the TPA. If this is the case then the client SHOULD receive the $ after the next valuation period. Sometime in 2008. I would ask for a copy of the SPD from the Co. If this is NOT the case then call the HR plan administrator and have them give you a good explanation of this, if that doesn't go anywhere call your local DOL (department of labor) who is the department that would deal with ERISA related issues.
Thanks for the feedback. I've asked the client to call HR and ask if another distribution for earnings would be made after year end before they proceed with contacting an attorney. I'm having a hard time believing that the client did not misunderstand, but he believes that this was a complete distribution and nothing else will be coming...we shall see.
Also, as an interesting aside, the client swears that one of the biggest gripes at the company is that no one ever sees plan documentation...no SPDs, or anything. Again, I'm having a hard time buying this, but again, we shall see.
I'll try to remember to update this as the facts unfold...
It's amazing what people will do. One time a rep told me that he had a client who was a business owner who had a 401k plan. The rep realized that the owner had not sent in any employee contributions in four or five months. He calls the owner, and the owner tells him that he is using the employee withdrawals as a "short term loan" for his business , but that he'll pay it back in January when he makes the match. Obviously, the rep had to explain the illegality of that plan, the owner was not happy.
Well, apparently the HR guy is a fool...told my client that since he pulled out midyear, he gets no interest. Next stop...ERISA attorney. I'll keep you posted...
Searching for something else and came across this one
I expect by now, that you've found out that the plan uses an antiquated accounting method called "balance forward" or "annual valuation". Gains/losses are allocated among plan participants as of a valuation date, often annual.
Should you leave and take your funds out prior to the valuation date, you get your balance as of the last valuation date. You forgo any accumulated gains (or losses) since that previous date.
Almost unknown now, it was once the accounting method for defined contribution plans. You client probably has little or no recourse since the method is perfectly acceptable to the IRS and DOL. However, I'd check the Plan document and the Summary Plan Description (SPD) to verify that the accounting method is spelled out. It probably is, so don't get your hopes up.
But, if it's not, then you may be able to jawbone the administrator into making an adjustment. The accounting method can be gamed by those in the know, leave funds in for the valuation in an up period, pull them out prior to the date in a down period . So if it's not spelled out in the SPD, your client may have some leverage
Josephus, I'm in the process of doing exactly what you recommend. It's hard to believe that as careful as firms try to be about being fair with 401(K) plans, that this type of stuff still exists. My biggest issue is that nowhere in the distribution package or forms were these folks warned about this quirk...
...I'll keep you posted...
i have had this happen on a few occasions. In each case the "full distribution" was as of the 12/31 date. Many TPA's only comptute an employees value once a year... I would be surprised if your client does not see another check after this calender year for the remaining balance. -JB