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Bankrupt Bosses Can't Touch 401(k)s
If the company I work for goes bankrupt, would my 401(k) assets be affected?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
August 15, 2005
If the company I work for goes bankrupt, would my 401(k) assets be affected? Do the same rules that apply to pensions apply to 401(k)s?
Money in a 401(k) is actually safer in the event of an employer bankruptcy than money in a company pension plan.
The money in a 401(k) must be held in a trust the employer can't touch, even if the business is having financial trouble. With a few minor exceptions, "there's no legal way for an employer to get its hands on your money after it has been sent off to the service provider," says Temple University business professor Jack VanDerhei, who also works with the Employee Benefit Research Institute.
In some cases, however, employers have raided 401(k) money after it was deducted from employee paychecks but before it was deposited into the trust. "In instances where companies fail to put the assets in trust in a timely manner, we take action to enforce the law," says Assistant Secretary of Labor Ann Combs.
If you suspect a problem with your employer, contact the Labor Department's Employee Benefits Security Administration at 866-444-3272. The agency recovered $764.8 million for participants in 401(k)s and similar savings plans in 2004.
The only other way your 401(k) could be hit by a bankruptcy is if you have loaded up on company stock. Enron Corp. offers the latest object lesson. Many employees had most or all of their 401(k) money invested in Enron stock, which fell from a high of $90 to just pennies a share. Part of the problem was that the company's matching contribution was entirely in Enron stock. Your best protection is diversifying your 401(k) investments. (See our sample portfolios for model asset allocations.) Think long and hard before you allow company stock to make up more than 10% of your 401(k).
