How do I know my 401(k) assets are safe from my company?

Here are some of the questions I have received over the years from employees concerned about their 401(k) assets:

Are my 401(k) assets safe from my company? Can my company withdraw monies from my account to pay company debts? Can they use my 401(k) account as collateral for a loan? What if my company goes bankrupt? Can my assets be seized along with the company’s? How can I be sure my company is forwarding my money to the mutual fund company on a timely basis or at all?

I usually answer by explaining that a 401(k) account is a separate entity from the company. This account is heavily regulated and can not be accessed by the company. I also tell them our 401(k) account is audited each year and as a part of this audit we must prove employee assets were transferred within Department of Labor guidelines. Currently our payroll company transfers employee deductions directly to our plan’s 3rd party administer shortly after our payroll has been run.

There was an informative article in today’s Milwaukee Journal that answers most of these questions: How safe is your 401(k)? by 401(k) adviser Michael J. Francis.

Francis explains Congress passed the Employee Retirement Income Security Act, known as ERISA, to safeguard qualified retirement plan assets in 1974. This act was a result of the demise of the Studebaker Motor Co. and the questionable business dealings of Jimmy Hoffa Sr. If you don’t know the story I highly recommend you read the article.

Francis informs us of ERISA's protections:

ERISA requires when your 401(k) contribution is withdrawn from your paycheck that the funds be deposited in a trust account, separate from your employer's assets and separate from any financial institution's assets.

This requirement protects you in the event your employer, or the financial institution that holds your retirement assets, runs into financial trouble.

This rule also protects 401(k) savings if you find yourself in the unfortunate circumstance of filing personal bankruptcy. This risk has always been an issue for business owners and professionals subject to malpractice lawsuits, but more people are benefiting from this protection in today's difficult real estate market.

There are two creditors, however, that even ERISA cannot protect you from: the IRS and a former spouse. The law states that if you owe either of these parties money, they can collect by a forced liquidation of your 401(k) account.

For a more informative answer to the basic responsibilities regarding timely 401(k) deposits I turned to the United States Department of Labor:

The deductions from employees’ paychecks for contribution to the plan must be deposited with the plan as soon as reasonably possible, but no later than the 15th business day of the month following the payday. If you can reasonably make the deposits in a shorter time frame, you need to make the deposits at that time.

For plans with fewer than 100 participants, salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law.

On the US DOL website I also discovered What you should know about your 401(k) plan a comprehensive publication covering everything you should know about your 401(k) plan. To protect yourself the DOL recommends you should review regularly:

• Make sure you have received the plan’s Summary Plan Description and read it for information on how your plan works. Read other documents you receive from your plan to make sure that you keep up with any plan changes, and check that the information on your benefit statement is accurate.
• If you are in a defined contribution plan, ask for information on the investment choices available in the plan, and find out when and how you can change your plan account investments. 
• If you suspect errors in your plan information, contact your plan administrator or the human resources department.  
• If there have been changes in your personal information, such as marriage, divorce or change of address, contact your plan administrator or the human resources department.
• Keep your plan documents in a safe place in case questions arise in the future.

Here are Ten Warning Signs your 401(k)Contributions are Being Misused:

• Your 401(k) or individual account statement is consistently late or comes at irregular intervals
• Your account balance does not appear to be accurate
• Your employer failed to transmit your contribution to the plan on a timely basis
• A significant drop in account balance that cannot be explained by normal market ups and downs
• 401(k) or individual account statement shows your contribution from your paycheck was not made
• Investments listed on your statement are not what you authorized
• Former employees are having trouble getting their benefits paid on time or in the correct amounts
• Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees
• Frequent and unexplained changes in investment managers or consultants
• Your employer has recently experienced severe financial difficulty

 If you suspect a problem the DOL recommends:
Starting with your employer and/or plan administrator. If you find an error or have a question, in most cases, you can start by looking for information in your Summary Plan Description. In addition, you can contact your employer and/or the plan administrator and ask them to explain what has happened and/or make a correction.
 
If that does not resolve the problem:
Contact the Department of Labor’s EBSA for questions about ERISA, help in obtaining a benefit, or:

• If you believe your claim to benefits has been unjustly denied or that your benefit was calculated incorrectly;
• If you have information that plan assets are being mismanaged or misused;
• If you think the plan fiduciaries are acting improperly; or
• If you think your employer has been late in depositing your contributions