What happens to your 401(k) money if the company you work for goes "belly up"? In one case, covered in a series of recent New York Times articles, employees have had their money frozen for more than five years.
The culprit appears to be the Internal Revenue Service, which has dragged its feet in providing its approval for the termination of the plan. Equally culpable, in my estimation, is the U.S. Department of Labor, whose motto and reason for existence is "Protecting the Rights of American Workers." Where was this otherwise noble government institution while this travesty played out? They should have leaned on the IRS.
The hero, not surprisingly, turned out to be the Vanguard Fund family, which stepped up and finally refused to keep paying out fund assets in fees to the accountants and consultants who continued to get regular payments for services as the frozen plan became their feeding trough.
On paper, of course, none of this should have happened. Retirement plan money is in a separate trust and is totally untouchable in the event of an employer's bankruptcy. Since a majority of Americans work for companies with less than 500 employees, this puts more than half of Americans in potential jeopardy, as smaller companies have a far greater propensity to actually close their doors after some reversal of fortune.
While the Enrons and Arthur Andersens of this world are an exception, I should point out that service companies like law firms can easily find themselves in a death spiral as partners leave for other firms and those remaining are left to shoulder lease and other financial obligations. A few large San Francisco law firms failed in recent years, which illustrates that even lawyers can go broke.
In my experience, when companies unravel, their owners and executives tend to become scarce. Most small company plans are "self-trusteed," which means that company owners, financial officers and maybe even human resource people elect to become the trustees of the plan. These are the only people who can control the assets and make decisions related to the plan. For example, every loan or distribution to an employee participant must be authorized by a trustee. All of a sudden, the plan at a bankrupt company can find itself with no trustees. Everyone has quit and the plan is in limbo until the bankruptcy court appoints someone.
Now that I've scared the daylights out of everyone, let me suggest an umbrella of protection. First, when you leave a company, always roll your money into your own IRA so that it is independent of the plan offered at your new job. With each job change, that IRA should be growing over the years. If you've been talked into rolling all of your current IRA money into your company's plan, roll it back out. It's been kept separate to preserve this option. If you're older than 591/2, you have the right -- even while still working -- to roll your money out into your own rollover IRA. Anyone within 10 years of retirement should probably consider doing that under any circumstances even if their company shows every sign of remaining solvent.
Be prepared for some blow back. The vendors of most retirement programs get paid based on the amount of money in the plan, so the "advisers" who encourage you to participate will try to make the case that staying in the plan is in your best interest. If one of the selling points is that the money in the company plan -- unlike IRA money -- is protected from personal bankruptcy or your creditors, they don't know that the law changed recently. Any money in an IRA whose original source was a retirement plan enjoys the same protection that it would have had if left in a company plan.
Once out of the plan, your money can be invested in any combination of stocks, bonds or mutual funds -- a vast investment opportunity compared to the limited fund selection in a company plan. This expanded choice is especially important when approaching retirement, as bond funds play a growing role. Keeping costs low is especially important in bond funds, and those in retirement plans often have plan expenses and commissions charged against what otherwise would have been your annual interest earnings.
In short, there are several reasons for rolling money out of a company retirement plan as soon as you have an opportunity, but one of the most important is the ever-possible threat of a corporate collapse and the inconvenience of having money tied up. You're guaranteed to get it sooner or later, but not without some sleepless nights.
Steve Butler is CEO of Pension Dynamics. Contact him at firstname.lastname@example.org or 925-956-0505, ext. 228.