SunGard Relius

With the recent dramatic decline in the market, many plan administrators (and their third party service providers) are asking whether they should conduct an interim valuation of plan assets in a balance forward plan. Notions of “fairness” aside, this question raises both fiduciary and tax issues and no matter what the plan fiduciary decides to do, someone is likely to be unhappy. Of course, if significant amounts are involved, the decision to re-value (or not to re-value) could result in litigation.

The first thing a plan fiduciary in this situation should do is examine the plan document. Many plan documents allow the employer, the trustee or some other fiduciary to conduct an interim valuation, an additional valuation which the plan terms do not require. The power to value the assets on an interim basis is most likely to prove useful in a plan with a single annual valuation date, but might also be beneficial where the plan provides for more frequent valuations, such as quarterly.

Assuming the plan permits interim valuations at the discretion of a plan fiduciary, should the fiduciary apply the provision where a participant has previously terminated employment and has requested his or her distribution? Under Code §411(d)(6), the valuation date under a plan is not a protected benefit. Treas. Reg. 1.411(d)-4, Q/A-1(d)(8). Rather it is a “right or feature.” This means that a participant does not have a protected benefit as to any particular valuation date and the plan fiduciary does not violate the anti-cutback rule if the fiduciary calls for an interim valuation in accordance with the plan terms.

What if the plan does not permit interim valuations? Where the participant has already terminated and the employer then amends the plan to permit an interim valuation, it is likely the terminated participant will raise anti-cutback. The argument may well prevail. See Boyertown Casket Co. Thrift and Profit Sharing Plan, 14 EBC 2464 (E.D. Pa. 1991) which held in favor the terminated participant. Proceed with great caution here. Consult legal counsel.

Assuming the plan does permit interim valuations, is the fiduciary in the clear? Although it is not free from doubt, the fiduciary ordering an interim valuation should be in pretty good shape. Under ERISA, the fiduciary must operate the plan in the best interest of the participants and beneficiaries. This means all of the participants. Sometimes, as in the case of a big market swing, the interest of the departed participants will be diametrically opposed to that of the remaining participants. The fiduciary is faced with the choice of whose ox to gore; of course, if the fiduciary revalues the assets, the outgoing participants will share the loss with those who remain behind. No doubt, the outgoing participants who are fixated on their most recent account statement will be upset.

What has been the prior practice for the plan where the market has gyrated wildly up or down? That certainly will be raised if there is a dispute. There is not necessarily one correct answer here. What if only one departed participant with a relatively small percentage of the overall plan assets is impacted? What if it is many participants or a large part of the overall plan is being distributed? In an extreme case, the court sided with the fiduciary who revalued the assets where the outgoing participant had 92% of the overall plan assets. If the fiduciary did not re-value, there would not have been any assets left in the plan (in fact the plan would have still “owed” more money to the departed participant). See Jasper v. M.H. & B.L. Jasper D.D.S. Profit Sharing Plan, 33 EBC 2497 (E.D. Mo. September 30, 2004). Not all cases will be that obvious. A plan fiduciary should consult with legal counsel before deciding to revalue (or not to re-value) plan assets.

In addition to the above considerations, a plan fiduciary might also consider: 1) amending the plan (avoiding any cut-backs) to provide for more frequent mandatory valuations, balancing any increase in cost associated therewith; or 2) adopting a reasonable policy which calls for interim valuations where there has been a more than x% market swing up or down (using the S&P 500 or some other index) since the last valuation. Such a policy may go some ways toward defeating a fiduciary breach claim related to an exercise of discretion in a particular case.

Finally, those charged with communication to participants about their account balance should use caution. Distribution notices and other communications reflecting account balances should be clear that any balance shown is only as of the date indicated and that this balance may not be what a participant will receive. Plan officials should use similar care in verbal communications with participants regarding their account balance.