Trent paddling down under
1) Do the 22c regulations apply to rebalancing activities?
As you probably know, these 22c rules are intended to identify and stop too frequent participant trading. These rules focus on investment movements directed by the participants.
Throughout the year, mutual funds will send electronic requests for clarification on trades to plan administrators. These are usually in response to unusual amounts or suspicious timing. The plan has an obligation to respond within a short time window. All can be done electronically, if the right systems are in place – but the system must make the right response based upon the information it knows.
The advantage with portfolios is that most of the trades are as a result of investment manager instructions for rebalancing. The contribution splits are done by the prescribed ratios. The withdrawals are done by the prescribed formulas. And any transfers internal to the portfolio for rebalancing whether on a daily basis or other frequency, are being done at the adviser’s standing instructions. These actions are not being done by the participant – but by the plan.
However, the only remaining participant activity is entering and exiting the portfolio. This process must be managed by the recordkeeping system to insure that it is adequately controlled to limit market timing. However, the fact that the portfolio is made up of several investments makes it more difficult if not impossible to take advantage of market blips.
There is some confusion here because of the workarounds many shops had to use to accommodate portfolios because of limitations in recordkeeping systems. A common workaround placed each underlying investment at the participant level; and then used allocation ‘package’s to manipulate the investment. Thus, the contribution, withdrawal, and rebalancing activities generate participant level history and activity. This not only creates unnecessary overhead on the recordkeeping system, but it actually creates a false view of 22c activities. It makes it difficult to determine what is at the participant direction and what is really at the direction of plan (advisor) direction. Unfortunately, all falsely appear to be participant activity.
Based upon our review with a reputable legal firm familiar with 22c, we believe that all the investment activities for the underlying investments come under the watchful eye of 22c. However, we believe most investment houses will relax the scrutiny if the recordkeeper explains that the funds are used in a plan managed portfolio. This means that the answer to most every query will be that there are no participants involved and it is a result of plan actions. This is particularly compelling if the plan can show adequate controls limiting participants in and out of the portfolio as a whole. However, this approach is cleaner if the underlying investment is solely used by the portfolio; if the same asset is still required by the plan for individual investment, a subaccount may be a good strategy.
2) How do the portfolio dividends get reported on the 5500?
Where the underlying investments are held on the recordkeeping system, the administrator must also manage and track the dividends for EACH investment. This is a complex and expensive process, particularly if it is done at the participant level. However, it makes the dividend information available for the standard 5500 interfaces from the recordkeeping system.
In other cases, the investment dividends are not reportable because of the asset wrapper. In the case of a collective trust or a mutual fund, the underlying dividends are not reportable because they are wrapped into the asset as a whole. Of course, these assets have their own regulations and reporting requirements – which also often mean additional cost. Unfortunately, this exception does not apply to a unitized portfolio.
In the case of a unitized portfolio, the dividends are baked into the price each day. They are accrued to provide for as accurate and level valuation as possible. In fact, there is no way to do it more equitably and as efficiently. The expected dividends are tracked and reconciled against the actual dividends posted. But, the only investment earnings type the plan sees is appreciation (or depreciation).
Yes, the recordkeeping system is only aware of the price. This is a substantial advantage to providing accurate and simple participant accounting throughout the year. It avoids pushing dividend accounting down to the participant level which makes all activities easier and cleaner, but particularly reversals. All the dividend account is done at a global level. So, the recordkeeping system is not aware of the dividend information to pass on to the 5500.
Based upon our review with a reputable legal firm familiar with 5500 reporting, we understand investment dividends for the underlying investments within a portfolio must be reported through to the 5500. No problem, the recordkeeping system will simply provide the interface to the 5500 tool as is. Then, the UnitZxchange tool will provide a plan level report showing the summary of dividends for the year. The dividend amount is then put into the proper line on the 5500 and the appreciation is adjusted accordingly. In order to automate this process, unitZXchange can provide an interface to update a user defined field in the recordkeeping system, and this can be mapped into the 5500 interface. This means you have the comfort of knowing the required information is closely tracked and readily available. And the advantages of managing the dividends at the global level more than outweigh the annual adjustment of one figure on the 5500 (which can also be automated).
Check out www.UnitZxchange.com for more details.
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