401(k) Plan Distributions Prove Tricky
BY WILLIAM F. SWIGGART
Companies within growth industries can better retain employees by offering them a 401(k) pension plan, but issues of plan management may prove troublesome. The number of lawsuits over plan administration has skyrocketed recently.
One issue of concern is that of delayed distributions. Because plan participant accounts are commonly allocated among one or more investment pools, the value of each participant's account remains unknown until after the value of each pool is calculated, when the participant's percentage interest can be applied to the pool.
Since pool calculations can take several weeks, it becomes necessary to fix the value of the participant's account prior to its distribution, and the resulting delay can cost the participant significant investment returns if it occurs during a rising market.
While one solution is to pay your plan management company to perform daily account valuations, the medium sized plan with, say, assets of $10 million or less may not find the expense worthwhile This can expose plan Trustees to the ire of plan participants in the event of a significant delay.
Liability Touches Only Plan Assets
What is the Trustees' liability to participants damaged by a distribution delay? The Supreme Court has held that in most cases any remedy for trustees' breach of fiduciary duty inures to the plan as a whole and not to the account of any participant. Thus, the Trustees are insulated from most participant complaints if they can show they acted in the best interests of the plan as a whole.
OK if "Administratively Practicable"
Plan administrative costs usually are paid from plan assets or by the company at its discretion. Since it does not benefit a plan to incur large administrative fees, cost can constitute a valid defense against a claim of dilatory distribution.
The plan language should include the following to buttress the cost defense: "Benefits payable to a Participant shall commence as soon as administratively practicable." It may be time to adopt a new plan document if your plan does not contain this language.
© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1994; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.