(b)lines Ask the Experts – Allocating Investment Fund Settlement Checks

February 11, 2014 (PLANSPONSOR (b)lines) – “Our plan recently received a Securities and Exchange Commission (SEC) settlement check for approximately $500.00 related to market-timing that occurred in one of our 403(b) plan investment options several years ago.

“Not only did our plan terminate the investment option long ago, but we’ve even changed recordkeepers since that time, so identifying affected participants would be impossible. What should we do with the check? It is so small relative to our plan assets (which are in the tens of millions) I am tempted simply to return it. Is that a prudent course of action?” 

Michael A. Webb, vice president, Retirement Practice, Cammack LaRhette Consulting, answers:

Receiving such settlement checks and deciding what to do with the proceeds as a fiduciary is often a quandary, for all of the reasons that you indicate. Litigation can take many years to settle, and often the investment to which the market-timing or other transgression related is a distant memory by the time compensation is received.

Fortunately, the Department of Labor (DOL) addresses the disposition of such proceeds with some degree of latitude in Field Assistance Bulletin (FAB) 2006-1 (see “DOL Issues Guidance on Allocating Mutual Fund Settlements”). The issue of the inability for plan fiduciaries to identify affected participants is discussed, and the DOL states that “if a fiduciary determines that plan records are insufficient to reasonably determine the extent to which participants invested in mutual funds during the relevant period should be compensated, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method.”

Small, or what the DOL calls de minimis distributions, such as the one provided to your plan are also addressed: “a plan fiduciary….may reasonably conclude that certain participant-level allocations that are not ‘cost-effective’ (e.g., allocations to participant accounts of de minimis amounts) may instead be used for other permissible plan purposes, such as the payment of reasonable expenses of administering the plan.”

Thus, in your particular case, per the language of the FAB, it would seem reasonable that the check could be used for the payment of legitimate plan expenses. However it should be noted that the FAB indicates that settlement proceeds should generally NOT be used to offset employer contributions to the plan. Also, per the FAB, another course of action that should be avoided is simply returning the check, since that would require that “there is no other permissible use for such proceeds by the plan (e.g., payment of plan administrative expenses).” Thus, to answer your question in this regard, you should NOT return the check.

Thank you for your question!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.