In recent years, the Securities and Exchange Commission has been aggressively taking action against various mutual fund companies, alleging late trading and market-timing activities. These actions usually result in settlement agreements between the mutual funds and the SEC.
The goal of the SEC is to ensure that plan participants, who were invested in the funds alleged to have engaged in late trading or market-timing activities, will be made whole for the losses that they incurred in their accounts.
For each settlement agreement, an independent distribution consultant is appointed to establish a plan to distribute monies from the settlement fund to appropriate fund shareholders, including retirement plans, subject to SEC approval.
It is not uncommon for employers, as sponsors for retirement plans, to receive a check in the mail with an explanation that the funds are attributable to a specific retirement plan, such as the ABC 401(k) Plan.
These checks arrive because the retirement plan is the shareholder of record in each mutual fund and must receive and deposit the check.
Upon receiving such checks, employers must review Department of Labor Field Assistance Bulletin Number 2006-01 issued on April 19, 2006, addressing alternatives for retirement plans to consider in connection with settlement proceeds.
In general, the alternatives for a plan sponsor when receiving litigation settlements include the following:
1. Allocate the funds to current and former participants in the retirement plan using a methodology described in the modified plan of distribution negotiated between the fund and the SEC.
2. Allocate the proceeds to the individuals who are currently participants in the retirement plan in a pro rata manner based on their total account balance in the invested fund, or a comparable fund if the original investment fund no longer exists.
3. Allocate the funds per capita among the accounts of all participants who are currently participants in the retirement plan.
4. If none of the preceding alternatives are administratively feasible, the payment may, to the extent permitted by the retirement plan, be used to pay reasonable administrative expenses associated with maintaining the retirement plan.
How to decide what to do
The above analysis is helpful to employers. However, employers must grapple with the best alternatives for each plan, based upon the size of the plan, the amount of the check, the number of participants affected and related issues. Common issues, alternatives and decisions are as follows:
• Some checks may be de minimus (so small or minimal that the law does not take it into account), such as $500 attributable to a period from 2002 through 2003. If no specific participant information is received, it's difficult to determine the participants to whom the check should be allocated.
Under such circumstances, given the lapse of time, an employer may reasonably decide that the proceeds will be deposited in the current Section 401(k) Plan and used to offset administrative expenses.
• Sometimes the letter identifies participants entitled to specific sums. When specific allocations are provided, employers generally consider allocating the funds to the proper individuals, if they are still participants in the retirement plan.
However, if the allocations are de minimus, and individuals are no longer participants in a plan, once again small amounts may be forfeited and used to pay reasonable administrative expenses for a plan.
• In some instances, given the lapse of time, the plan to which a check is issued may have terminated or merged into another plan. In such situations new checks must be issued to the name of a proper plan to be deposited.
• In some situations, the amount of checks may be significant. In this context, employers should make best efforts to work with the current or former recordkeepers for a retirement plan and to determine if a reasonable allocation to specific participants is feasible.
Document everything
Regardless of the alternatives, an employer must carefully document the receipt of the check, the analysis performed in deciding whether funds should be allocated to participants or used to offset administrative expenses.
Documentation of such decisions is important to ensure that an employer is following the basic ERISA procedural prudent standards to act in the best interest of plan participants. Such analysis and documentation will also be helpful in the event of a future IRS or DOL audit where the actions taken by an employer may be questioned.
Palmieri can be reached at
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