Can My Employer Steal My 401k?

by Gary Foreman

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Many companies go out of business. Please address what will happen to the 401k if that happens. Some folks have lost everything because the company considers a 401k their property.

Let's begin by easing BC's mind a little. Just because an employer goes out of business, your 401k plan does not go down the tubes with them. The company does not own your 401k. It cannot be used to pay business debts.

Any company that considered its employees' 401k plan money as "their property" would be guilty of theft. So, if BC knows of people who have lost money that way, he should suggest that they contact the sheriff!

It's very unlikely that BC is going to lose his 401k to company theft. But that's not to say that there isn't some danger for BC's 401k account if his employer goes under. There are two risks.

The first risk is that the value of the investments held in his 401k could drop. Especially if he holds stock in the company he works for. His employer may have matched his contribution to the 401k plan and invested their contribution in company stock. In fact, many companies will only buy company stock with their contribution. If the company is having financial troubles, that stock could have decreased in value.

One trick will help BC minimize this danger. Generally he can sell the company shares after a certain period of time. The 401k 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 that he can and reinvesting in something more secure.

Many employers will also encourage employees to invest their contribution in company stock. That's usually not a good idea. If something happens to your employer, you could lose your job and watch the value of the stock in your 401k plummet. Especially if company stock is the only investment in the account. That's what happened to many people at Enron. And probably what happened to the people that BC asked about.

If you do leave the company, take the 401k 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.

There's one other risk that BC's 401k plan faces. If a company goes bankrupt, the 401k 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 401k plans. If a plan is orphaned, the U.S. Department of Labor (DOL) is responsible for protecting the assets. So far, they've guarded over $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 Dept. of Labor's Employee Benefits Security Administration at 202-219-8776 or toll free at 866-275-7922.

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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 401k account is like any other investment account. You need to understand the risks and manage them if you want to protect your money. But if someone tries to steal your money, it's still illegal.

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Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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