• 57°

Retirement plan security inspection

Given recent events in the news, many employees have begun wondering what would happen to their 401(k) dollars if their company were to go into bankruptcy, out-of-business, or was merged or acquired by another firm.

This is a question that few employees think about when making contributions to their company retirement plan. Yet, in the economic environment of today where corporate closings and restructuring are not uncommon, it makes sense to know what level of safety exists.

Retirement plans are managed exclusively for the benefit of participants by plan officials called fiduciaries and trustees.

A fiduciary is any person who exercises any discretionary authority or control over the management of the plan or its assets, or any person who is paid to give investment advice regarding plan assets.

A trustee has the responsibility of collecting and holding plan assets in trust for the participants. The obligations required of fiduciaries and trustees means that they are ultimately responsible and held accountable for the safety of the participants’ money.

It is important to know that there are laws specifically designed to protect the interests of qualified retirement plan participants and their beneficiaries.

The Employee Retirement Income Security Act (ERISA) was passed in 1974 to specifically protect the retirement plan assets of qualified retirement plan participants. For defined contribution plans—such as 401(k)s—the Department of Labor (DOL) and the Internal Revenue Service (IRS) also oversee various rules and regulations to enforce fiduciary compliance, participation, vesting (ownership) and funding standards.

Under the various rules of ERISA, benefits under a 401(k) plan are protected from creditors if a company goes bankrupt. No matter how much a struggling company may need access to funds, they cannot use plan assets for such purposes as buying equipment, paying rent or paying creditors. Your retirement dollars are held “in trust” for your benefit—not for the benefit of your company.

Participants are always 100 percent vested in their own contributions to a 401(k) plan. While it usually takes several years to become fully vested in any employer contributions, if a qualified plan is terminated, the employees immediately become 100 percent vested. IRS approval must be received before any qualified plan can be terminated. Once approval for a termination is obtained from the IRS, the full amount of plan assets are distributed to plan participants.

If you would like to know more about ERISA, or if you require more general information regarding qualified retirement plans, such as a 401(k) plan, contact your financial adviser. After all, the more you know about your retirement plan, the more secure you are likely to be upon retirement.