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401(k) 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 401(k) plan related to contributions, distributions, inter-fund transfers or fee payments. This transaction volume makes 401(k) recordkeeping complicated, requiring specialized expertise to do it well.
The unseen and complex nature of 401(k) recordkeeping can make it difficult for small businesses to monitor their 401(k) recordkeeper for competence – an important fiduciary responsibility. That’s a problem because 401(k) fiduciaries can be personally liable when their plan is harmed by poor recordkeeping – especially when 401(k) fiduciaries turn a blind eye to obvious signs of poor performance.
Fortunately, it doesn’t need to be difficult for 401(k) fiduciaries to identify poor 401(k) recordkeeper performance. Problems related to transactions involving money in or out of a 401(k) 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 401(k) fiduciaries - Look for long-term uninvested cash. It’s a symptom of many hard-to-find 401(k) recordkeeping problems.
Reasons for uninvested 401(k) cash
All 401(k) 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 401(k) cash is transient, however. Some cash is a symptom of underlying 401(k) problems that require recordkeeper action to correct. Good recordkeepers find this cash timely by reconciling all the cash in a 401(k) plan daily. Finding this cash quickly is important for 401(k) 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 401(k) custodian – the firm that holds your plan assets. These reports will show all 401(k) plan assets, invested or not.
You should receive trust reports from your 401(k) custodian regularly – usually quarterly. If the 401(k) 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 401(k) plan sponsors have a fiduciary duty to monitor their 401(k) recordkeeper for performance. Absent overt symptoms of dysfunction, like contributions or distributions sitting unprocessed, meeting this important responsibility can seem impossible for many 401(k) fiduciaries. It doesn’t need to be – just look for uninvested cash.
