401k Fiduciary Pro Tip: Uninvested Cash Can Be a Symptom of a Bad 401k Recordkeeper
401k recordkeepers are like icebergs – you can only see a small fraction of the services they provide. Behind the scenes, they can process tens, if not hundreds, of transactions every day for a 401k plan related to contributions, distributions, inter-fund transfers or fee payments. This transaction volume makes 401k recordkeeping complicated, requiring specialized expertise to do it well.
The unseen and complex nature of 401k recordkeeping can make it difficult for small businesses to monitor their 401k recordkeeper for competence – an important fiduciary responsibility. That’s a problem because 401k fiduciaries can be personally liable when their plan is harmed by poor recordkeeping – especially when 401k fiduciaries turn a blind eye to obvious signs of poor performance.
Fortunately, it doesn’t need to be difficult for 401k fiduciaries to identify poor 401k recordkeeper performance. Problems related to transactions involving money in or out of a 401k plan are the easiest to identify. New contributions should appear on recordkeeper reports within 3 days of deposit and distribution checks should be in the hands of the participant or rollover institution within 2 weeks of request. Problems with other transactions – ones that happen completely inside a 401k plan – can be more difficult to discern.
My pro tip for 401k fiduciaries - Look for long-term uninvested cash. It’s a symptom of many hard-to-find 401k recordkeeping problems.
Reasons for uninvested 401k cash
All 401k plans regularly hold uninvested cash for short periods of time. It results from two-part transactions where the first part of the transaction has happened, but not the second. Examples include newly-deposited contributions that haven’t been invested or inter-fund transfers where the fund sales have traded, but the purchases have not. This “transient” cash is used up when the second part of the transaction happens, usually in a day or two.
Not all 401k cash is transient, however. Some cash is a symptom of underlying 401k problems that require recordkeeper action to correct. Good recordkeepers find this cash timely by reconciling all the cash in a 401k plan daily. Finding this cash quickly is important for 401k fiduciaries because the sooner it’s found, the sooner the underlying problem can be corrected, mitigating the chances of any fiduciary liability. Examples of problems that can result in uninvested cash include:
- A rollover contribution is made with no participant identification
- Loan payments are made to the plan after a participant has paid off their loan
- Contributions are made to the plan for ineligible employees
- A fund price is corrected after a participant trade settles
- A participant is charged short-term redemption fees, but these fees are not distributed to the mutual fund company
- A dividend is received, but not allocated participants
- Revenue sharing payments are received, but not allocated to participants
Where to find uninvested cash
You won’t find uninvested cash on plan recordkeeping reports – these reports only show invested plan assets. You can, however, find uninvested cash on plan trust reports produced by your 401k custodian – the firm that holds your plan assets. These reports will show all 401k plan assets, invested or not.
You should receive trust reports from your 401k custodian regularly – usually quarterly. If the 401k custodian serves in a “directed trustee” capacity – a fiduciary role – they may also provide an annual report certified for accuracy.
If you have questions about the cash you see on your plan trust reports, you should ask your recordkeeper about it. Assuming they reconcile your plan’s cash daily, they should be able to get you a quick explanation.
Follow the money!
Small business 401k plan sponsors have a fiduciary duty to monitor their 401k recordkeeper for performance. Absent overt symptoms of dysfunction, like contributions or distributions sitting unprocessed, meeting this important responsibility can seem impossible for many 401k fiduciaries. It doesn’t need to be – just look for uninvested cash.
About Eric Droblyen
Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.