The NYC Deferred Compensation Plan is Bouncing Checks
In the past few months, we have experienced several instances of the NYC Deferred Compensation Plan bouncing rollover checks it has issued directly to participants of the plan. We will examine why this is happening and offer two potential solutions that would improve upon the Deferred Compensation Plans current process.
What is going on?
In a few instances plan participants that have chosen to rollover all, or some, of their investment capital from the NYC Deferred Comp Plan have had checks bounce after being deposited. The rollover checks are being deposited and credited to the participant’s new account. Then, several days later, The Deferred Compensation Plan’s bank (State Street Bank) is refusing to honor the check and transfer the money into the new account. This introduces extraordinary operational risk into a process that should be automatic.
Why is this happening?
The feedback that we have received is that the plan Administrator (Voya) has recently issued instructions to State Street Bank to bounce any check that has anything written on the front of it or is signed by the participant. This is a new policy.
Is this standard practice?
No!
Is there a reason to write on the front of the check?
Yes! The Deferred Compensation plan is issuing checks without the client’s account # on it.
For example, John Smith wants to rollover money from the Def Comp Plan to one of his new accounts. He has three total accounts, two IRA’s and one ROTH IRA. The check must be made payable to the Custodian, let’s say it is the Bank of New York in this case. However, it needs to be further credited to John Smith’s IRA account when the Bank of New York deposits it. Since the account number isn’t listed on the check it has to be written on the check, after all it needs to go not only to John Smith, but also to the correct IRA account since he has two.
Can they bounce a check if the participant signs it?
Yes! As mentioned above the check is made payable to the Custodian. When John Smith receives the check if he makes an honest mistake and signs the check it can be bounced! It’s not made out to him, even though his name is in the memo section and it will be further credited to one of his accounts. Yes, this is a bit confusing. Previously, these checks were deposited and cleared without issue. However, under the Deferred Comp’s new policy these checks are now being bounced.
This raises the question, why are participants being mailed checks in the first place?
Why are participants being mailed rollover checks?
We don’t know why. However, it is our opinion that this is an inefficient and dangerous way to process rollovers. Mailing checks to participants creates an extra unnecessary step in the process that introduces an opportunity for error. This should be a Trustee-to-Trustee transfer, not a Trustee-to-participant-to-Trustee transfer. Upon receipt, the participant has to make an extra trip to the post office to mail the check overnight express to its final destination. This also increases the time that the participants money is out of the market (uninvested). This begins when the check is issued, continues while it is in the mail (both mailings), and ends when the check finally clears 4-5 days after being credited to the new account.
The Extraordinary Risk of a Bounced Check
When rollover checks are deposited into a clients account the standard practice is to invest the money immediately. Clients do not want to be out of the market, and institution to institution transfers are almost 100% safe. This is no longer feasible when dealing with NYC Deferred Compensation Plan rollovers given the new risk of the plan not honoring the check it has issued. Let’s say John Smith has a large balance of $1M and it is all invested on the day his account is credited. Over the next three days the market has a severe drawdown, and the value of John Smith’s account decreases to $900,000. On day four John Smith and his new Advisor are notified that the NYC Deferred Compensation Plan is not honoring the check that they issued. The account balance is now negative $100,025. What happened? The Bank of New York (the custodian) required the account to be liquidated and $1M returned, but John Smith’s account was only worth $900,000 when they had to force liquidate it, so John Smith’s account is short $100,000. To add insult to injury, John Smith is charged a $25 fee for the bounced check.
Who is on the hook for the $100,000? The bank/custodian will not pay, they are only facilitators of the transaction. The NYC Deferred Comp Plan won’t want to pay. We are sure that John Smith won’t want to pay. And his new Advisor won’t want to pay such a large sum for an operational error caused by the Deferred Compensation Plans policy. So, who owes this $100,000? This is the extraordinary operational risk introduced by a poorly designed policy to bounce checks that have reached their appropriate destination as indicated on the rollover forms.
Possible Solutions
Can this be fixed? Yes, we propose two solutions. The easiest solution is to print the underlying account number on the check so that it does not need to be written on. However, the Deferred Compensation Plan should go one step further. The rollover checks should be mailed directly to their destination, not to the plan participant. Introducing this extra step into the rollover process introduces only risk, with no potential reward.
There is an even better solution, one that could give clients access to their funds 5-10 days faster than the current process. The NYC Deferred Compensation Plan should use bank wires to transfer rollovers. There are several benefits including:
Less time out of the market (uninvested). The wires will arrive the same day they are sent, instead of spending several days traveling regular US mail
No checks lost in the mail
No risk of a check being altered
Funds will clear much faster without the operational risk of a check not being honored
The NYC Deferred Compensation Plan is a massive plan with over $25B of participants assets. It can do better than to bounce checks on plan participants that have entrusted them with their investments for many years. The NYC Deferred Compensations Plan’s new policy to bounce checks has directly caused this issue, and it should reexamine this policy and fix it. We have offered two solutions that would fix the problem. The quickest solution would be to stop mailing participants checks, and to send them to the new institution with the participants new account number in the memo section. An even better solution is to use bank wires for speed and efficiency. A massive plan the size of the NYC Deferred Compensation Plan should be able to implement either of these solutions with ease.
