Can My Employer Steal My 401(k)?

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This post, written by Gary Foreman, originally appeared on partner site The Dollar Stretcher.

Here’s an email I recently received from a reader. Perhaps you’ve had a similar concern…

During this shaky financial time, many companies have gone out of business. Please address what will happen to 401ks (should that happen.) Some folks have lost everything because the company considers a 401k their property. – BC

Let’s begin by easing BC’s mind a little. When an employer goes out of business, your 401(k) plan doesn’t go down the tubes with them. The company doesn’t own your 401(k) and it can’t be used to pay their debts.

Any company that considered its employees’ 401(k) plan money “their property” would be guilty of theft. So, if BC knows of people who have lost money that way, he should suggest they contact authorities immediately.

It’s very unlikely that BC is going to lose his 401(k) to company theft. But that’s not to say that there’s no risk in the event his employer goes under. There are two.

The first risk is the value of the investments held in his 401(k) could drop, especially if he owns stock in the company he works for. His employer may have matched his contribution to the 401(k) plan, but invested the match in company stock. In fact, many companies will only offer company stock as their contribution. If the company is having financial troubles, that stock could obviously decrease in value.

To minimize this risk, BC should consider selling the company shares as soon as possible. The 401(k) plan administrator will be able to tell him how long he must hold them. If he thinks that the company may be having trouble, he’ll want to consider selling any shares he can and reinvesting in something more secure.

If your employer encourages you to invest in company stock, generally you should just say no. The reason is simple: If something happens to your employer, you could lose both your job and your savings. It’s happened before with companies like Enron. And it may have happened to the people BC asked about.

If you do leave the company, take the 401(k) with you. You are not obligated to leave it under the company’s oversight. You can roll the proceeds into an IRA and eliminate any potential bankruptcy problems with your former employer.

The second risk associated with a 401(k) is bankruptcy. If a company goes bankrupt, the 401(k) plan for that company is said to be “orphaned.” An orphaned plan is one where the sponsor and fiduciary have abandoned the plan.

The employee’s money is still in the plan. But without the fiduciary and sponsor, it’s not possible for the employees to get at the money. The same problem can exist when a sole proprietor dies without leaving written instructions as to who succeeds him.

Fortunately, there’s a way out of this wilderness. The Employee Retirement Income Security Act of 1974 (ERISA) governs 401(k) plans. If a plan is orphaned, the U.S. Department of Labor (DOL) is responsible for protecting the assets. So far, they’ve guarded more than $200 million.

Naturally, the trick is getting new sponsors and fiduciaries in place as soon as possible so you can move your assets. Don’t wait for the DOL to contact you. Usually they find out about an orphaned plan when a participant in the plan tells them about it. You can call the Department of Labor’s Employee Benefits Security Administration toll-free at 866-275-7922.

Also, check with the plan administrator or your union. It is possible that the plan will be terminated and all of your money will be distributed to you. Or a new administrator may be assigned without the DOL getting involved.

The bottom line is that your 401(k) account is like any other investment account. You need to understand the risks and manage them to fully protect your money. But if someone tries to steal your money, it’s simply illegal.

Gary Foreman is a former financial planner who currently edits The Dollar Stretcher.

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