We are a medium sized TPA which still runs a few quarterly valued balance forward 401(k) plans. When election changes are made, we do estimated transfers of 80% of participants balances as of the last valuation date and complete the transfers when the current valuation is done. For example, a calendar year balance forward plan permits election changes quarterly. A participant completes a election change form in June, to be effective July 1st. On July 1st, we transfer 80% of his or her account balance as of March 31st, the last valuation date, and the rest when the June 30th valuation is complete.

When we instituted this procedure 8 years ago or so, we had many more balance forward plans. The 80% amount was the industry standard at the time. We are now reviewing a number of our procedures, including this one, and wonder it is reasonable and still the industry standard. Any thoughts from you balance forward TPA's out there?

Thanks

I still have a few. I haven't changed the way that I've been doing transfers since the early 90's. I take the extra step of adding in contributions and a simple earnings calculation using the ROR calculated from change in NAV * (begbal + 5/12 ctrb to date). Gets me close enough without expending that much more effort. Of course, my plans don't have more than 10 funds so getting those ROR's is not that time consuming. So it boils down to what's worse...transferring a little too much or not quite enough.

When do you do the calculation? Do you then true it up and make final transfers when the valuation is done?

Yes. Absolutely. Sorry, should have put that in there. Calculation is done 7/1 and cleanup transfer done when allocation is complete; usually 10-15 days later depending on trust.

My rationale for our process is that we just try to get that initial transfer as close to the true balance as possible so as to mitigate the size of that final transfer. We are trying to minimize the exposure for the other participants. To me, 80% transfer rate leaves too much sitting in the fund from the point of the allocation date until the date the final transfer takes place. Assuming the worst and you have a large portion of a fund transferring out the exact same quarter that the trust is late in supplying their statements and the fund dips during the period only to recover the last 70 days. You then had 20% of that account accruing a loss in the fund for 20+ days. Do you go back and calculate THAT loss and transfer it after the 9/30 allocation? You'd have to.

I wouldn't buy into anything less than a 90% transfer and definately wouldn't do that without applying a simple ROR earnings calculation to it first. Maybe I'm overdoing it though.