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In today’s uncertain times, people are asking questions concerning the security of their retirement savings plan like a 401k at their workplace.   But there’s good news. Your 401(k) account cannot be taken to pay for company debts.  The questions come from a lack of understanding of how 401k are structured and how they work.  It is really not that complicated and hopefully after reading this article, you will understand how these qualified plans work.

The first thing you have to understand is that YOU own the 401k (at least the funds that are vested).  The funds that are not vested just means that some portion of the account may have some strings attached.  Investopedia defines vested as ” the lawful right of an individual or entity to gain access to tangible or intangible property now or in the future. A vested interest is an entitled benefit, which can be conveyed to a separate party. There is usually a vesting period before the claimant can gain access to the asset or property.  Due to the right of ownership, the benefit cannot be taken away.  Typically any money that you contribute yourself is fully vested from the moment you put it into the plan. Employer matching contributions, however, may have some vesting requirements.  A common one is that an additional percentage of the company contribution is vested for every year that you work for the employer. The company’s portion is not fully vested until the conditions are met.  So any money that you’ve contributed is fully yours. And any portion of the company’s contributed that is vested also belongs to you. You own it.

The other thing that needs to be understood is what the “plan administrator”.   The administrator oversees the plan for you. The administrator will collect contributions from you and your employer, invest and distribute them per your instructions and the law, and keep track of the funds and provide reports to you and when appropriate to the IRS.  Chances are that you’ll never meet the administrator in person. You’re much more likely to talk by phone or to use forms available in your human resources department to send instructions to them.  Remember, they do not own your account.  They just service it for you.  For that service they charge a fee.

The other thing which needs to be discussed is the investments within the account.  The administrator will have a number of investment choices available for you.  Typically, they have stocks, mutual funds and some safer options like bonds, U.S. Treasury bills or maybe CDs.  Many plans include the employer’s common stock if it’s publicly traded.  Naturally, the company is happy to have employees invest in it.  But that can be dangerous.  If the company struggles, not only could you lose your job, any shares in company stock could lose most of their value.  If the company goes downhill so will the value of the company stock and therefore your 401k value.  This is the biggest danger to your account.  Just remember, your 401k account cannot be used to pay company debts.  In order to protect yourself, it is wise to limit the amount of company stock you have in your retirement account.  If you get shares of the company as the company’s contribution, then find out from the plan administrator when you’re allowed to sell those shares.  Then sell them and reinvest the money in something else.  There is one other risk if your employer goes out of business.  A bankrupt company could leave an “orphaned” plan.  That’s when the company and the administrator have abandoned the plan.  That would severely restrict your ability to get at your money or change investment options.

You can go to the Department Of Labor  and has a FAQ page on abandon plans (go to http://www.dol.gov/ebsa/faqs/faq-abplanreg.html).  In short a custodian will be appointed and the funds distributed to you, so you can reinvest it. If your employer has declared bankruptcy, take immediate action. Contact the plan administrator. During the winding-down period that accompanies bankruptcies, the administrator may still be able to respond to your instructions. Once you get your money reinvest it.  I suggest setting up a self directed IRA or a solo 401k.   DO NOT spend the money since the tax penalty is high.

In summary, if your company does declare bankruptcy, your savings could be in jeopardy because of falling company stock value (if you own company stock) or your inability to get out of your investments and control your account.  The company’s creditors will not be able to get at your 401k savings, so that is not an issue.

 


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