With the technology to facilitate daily valuations of defined contribution plans readily available, we see fewer and fewer plans that operate with annual valuations and balance forward plan accounting, but balance forward plans do still exist. As illustrated by a recent case, distributions from balance forward plans can present difficult fiduciary decisions when there is a significant swing in the market value of plan assets.
In December 2008, a participant in a 401(k) profit-sharing plan requested distribution of her benefits based on an account valuation date of December 31, 2007, which was the most recent valuation preceding the date of her distribution request. Under the plan terms, valuation of the assets must be conducted at least annually, but the plan administrator may request interim valuations. Plan terms state that assets are distributed based on the valuation date that “immediately precedes the date the participant receives his/her distribution from the plan.”
Because the plan’s value dropped dramatically over the course of the 2008 plan year, the plan sponsor determined that processing the participant’s claim using the December 31, 2007 valuation would be a breach of fiduciary duty owed to the remaining plan participants. Accordingly, the participant’s distribution was processed using an upcoming valuation date of December 31, 2008, which would have resulted in the participant receiving approximately $60,000 less than she anticipated.
The participant refused to take receipt of the distribution based on the 2008 valuation, but later accepted a distribution based on a valuation date of December 31, 2009. The 2009 valuation was still nearly $36,000 less than the original 2007 valuation. After making a claim under the plan’s claims procedures, which the plan denied, the participant sued and sought to recover the difference between what she eventually received and her expected payout based on the December 31, 2007 valuation.
The court ruled the plan sponsor reasonably decided to use the 2008 valuation to distribute the participant’s benefits because that valuation more accurately represented the true value of her account. The court concluded the plan sponsor acted reasonably when it determined that, due to unforeseen market conditions, paying benefits to the participant based on the 2007 valuation would prejudice the other participants in the plan, and that the plan sponsor reasonably concluded that making a distribution based on the 2007 valuation would have allowed the participant to escape her share of the losses occurring in 2008 and forced the other participants to bear those losses.
Given that the participant’s request for disbursement came a mere two weeks before the scheduled end-of-the-year valuation for the 2008 plan year, the court also concluded the plan sponsor did not act unreasonably by waiting to apply that 2008 valuation. Conducting an interim valuation would have required additional expenditure, and the already-scheduled 2008 valuation provided an accurate valuation of the participant’s account for disbursement. (Wakamatsu v. Oliver, N.D. Cal. 2012)