As a 401(k) participant, “lost earnings” refer to the investment gains your 401(k) contributions would have accrued if they had been in your account when they should have been. When there's a delay in depositing your contributions, those funds miss out on potential growth within the market.
Why you might receive lost earnings adjustments
You may receive lost earnings adjustments if there's a delay in depositing your personal contributions (deferrals), your employer's contributions, or both. Lost earnings are calculated following specific formulas set by either the IRS or DOL, depending on why the lost earnings are owed.
Here are the primary reasons you may receive lost earnings adjustments in your account:
Late deposits of employee contributions: Your personal contributions (deferrals and loan payments) are generally deducted directly from your paycheck and should be deposited into your 401(k) account as soon as they can reasonably be separated from your employer's business assets. If these deferrals or 401(k) loan repayments are withheld from your pay but not deposited promptly, it's considered a late deposit. This is viewed by regulatory agencies, like the IRS and DOL, as your employer temporarily holding onto your funds for their own use.
Missed deferrals: If your employer fails to withhold deferrals from your pay when they should have, this is known as a "missed deferral opportunity." In such cases, your account may receive a corrective contribution called a Qualified Nonelective Contribution (QNEC), which is an employer contribution that is 100% vested. Lost earnings will then be calculated on this QNEC using the original payroll date when the deferral should have occurred.
Late employer contributions: Employer contributions also have specific deadlines for deposit, which can be outlined in your plan document. If these contributions are deposited after their applicable deadline, lost earnings will apply to that contribution.
Third-party errors: In rare instances an error on the part of a third party (e.g., Guideline or your payroll provider) will result in some assets being out of the market for an extended period of time. In certain cases, that third-party will generally cover the applicable lost earnings. This would be determined on a case-by-case basis after investigation into the cause of the delay.
Does Guideline notify you about lost earnings?
If lost earnings apply to your account, generally Guideline will notify you via email with details regarding the adjustment. Once applied, you’ll also be able to see this activity as a “Correction” in the Transactions section of your Guideline dashboard and reflected on your applicable quarterly statement.