Balance Forward Plans: The More Things Change, The More They Stay The Same

If you’re a Bon Jovi fan, you’ll recognize the expression in the headline, “The More Things Change, The More They Stay The Same”. It's Track 12 on Disc 2 of their album, Bon Jovi Greatest Hits - The Ultimate Collection

But, of course, that’s not Jon pictured here. It’s Jean-Baptiste Alphonse Karr (November 24, 1808 – September 29, 1890), a French critic, journalist, and novelist, to who was attributed the epigram, "plus ça change, plus c'est la même chose" which usually translates to "the more things change, the more they stay the same”.

Never heard of Monsieur Karr? Well, he's actually got a Facebook page.

So you’re asking, what this has to do with balance forward plans? You may also be asking what exactly is a balance forward plan? 

Let me fast forward to the bottom line (literally and figuratively).

If you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one.

Let me explain why.

Balance Forward is an industry term given to those original participant directed 401(k) and profit sharing plans, many of which are still around. Unlike the more common daily valuation plans, participants’ accounts are valued monthly, quarterly or annually. After all the balance forward plan accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements.

What’s the problem you might ask? Let’s hearken back to November, 2008 at which time I blogged, Balance Forward 401(K) Plans: Someone's Gotta Win, Someone's Gotta Lose and Balance Forward Plans Revisited.

Now consider these two alternative scenarios of a participant in a balance forward plan with a $50,000 account balance as of September 30, 2008. The participant receives a distribution for $50,000 on November 1, 2008, but between September 30 and the distribution date, the plan lost 20%. Thus, the plan - which is to say - all the remaining participants had to eat the $10,000 loss.

But say, instead of October, 2008 being October 2008, the plan's assets increased by 20%. That  participant receives the same $50,000 distribution, but only the remaining participants share in the $10,000 gain.

See the problem.

So now here we are again today (“the more things change, the more they stay the same”), when there could be a decided difference between the June 30, 2011 valuation and September 30, 2011 valuation.

What’s the solution? Maybe balance forward plans should provide for interim valuations. But with all matters ERISA, there are complicated legal, tax, fiduciary and human resource issues involved. No easy answers, but definitely a situation that should be discussed with advisors. In the meantime, here is an excellent discussion of the issues involved by Sungard Relias, Interim Valuations in a Falling Market – It’s déjà vu all over again.

Now daily valuation isn't perfect either, but …… 

Photograph above: Woodburytype circa 1870s. Photo by Antoine Samuel Adam-Salomon.

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