Magazine article Personnel Journal

Access to Cash: The Debate

Magazine article Personnel Journal

Access to Cash: The Debate

Article excerpt

EMPLOYEES WANT DAILY ACCESS TO RETIREMENT SAVINGS, BUT EMPLOYERS FEAR ADMINISTRATIVE CHAOS. WHAT'S THE ANSWER?

BY FELlCIA PALMER

DAILY RECORD KEEPING AND DAILY transaction have become buzzwords in the benefits world. Many employees want these services, but some plan sponsors are afraid of them and a great many people really don't understand what they're all about.

If your company has a retirement savings plan, such as a 401(k), it's likely that this issue will be coming up soon, if it hasn't already. Daily record keeping is designed to give investors more control over their money. It's a simple idea: Employees should be free to move their money from one investment option to another whenever they want.

Some companies, however are afraid that this flexibility would be abused. Although investing for retirement should be a long-term proposition, employees might react to the daily blips in the economy and play the markets for short-term gains. Frequent shifting among investment options could be a major paperwork headache for the people who administer the plan.

A recent survey of the clients of IDS Trust, a full-service institutional trust provider in Minneapolis that serves employee pension and savings plans, shows that the fear of employees' abusing daily capabilities is unfounded. In fact, part of the value of this kind of program is psychological because, although participants seem to want to be able to make daily changes, few of them actually take advantage of their ability to do so.

Many companies are considering changing their retirement savings plans to provide better service for their employees. If your organization is examining its options for improving its programs, you should understand what daily record keeping is and how it operates.

What is daily record keeping? Using this system, each account is valued, and earnings and share or unit prices posted to the account daily. Investors can call a toll-free number to find out the current value of their accounts on any given day.

The advent of daily processing of accounts and record keeping has made daily transaction a reality. Until recently, if a plan participant wanted to change from a mutual fund to a guaranteed investment contract (GIC), he or she might ask for the transfer of funds, however, might not happen until two or three weeks after the end of the month or, in some cases, at the end of the quarter.

For example, under traditional plans, if an investor thinks the stock market is going to fall and wants to transfer money in the retirement plan from mutual funds to the insurance-based GIC, he or she asks for the transfer on the 10th. By the last day of the month the mutual fund has lost 10% of its value.

The employee thinks that, because the request to transfer out was made in time, he or she has been spared the loss. The actual price obtained on the shares, however is the price on the 31st when the fund is down. The participant has been astute enough to make the decision to switch, but the savings plan isn't responsive enough to keep up.

As the value of the shares continues to fall, the seller may not be the only investor who's hurt by an inflexible record-keeping system. Because the actual sale doesn't occur until two or three weeks after the end of the month, allowing for processing and reconciliation time, the remaining participants in the fund have to make up the difference between the amount credited to the seller and the actual value at the time of sale. In effect, they subsidize the sale.

These problems can be avoided by using daily record keeping. The sale happens and the money is transferred on the same day the request is made. If a person is smart enough to see a dip in the market coming, he or she doesn't have to watch a retirement nest egg shrink just because a transaction couldn't be made in time. Many people who foresaw the stock market crash of 1987 couldn't get their money out because of processing delays. …

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