Can My Employer Steal My 401k?

by Gary Foreman

Do you know what happens to your 401k if your employer goes out of business? Can your employer take your 401k for any reason? We explore just how safe your 401k plan is.

Gary,
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.
BC

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 authorities!

Two real risks to your 401k

While your employer might not be able to take your 401k, there are a few real risks you should be aware of regarding your 401k.

1. The value of the company stock in your 401k could drop

The first risk is that the value of the investments held in your 401k could drop. Especially if you hold stock in the company you work for. Your 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 decrease in value.

One trick will help minimize this danger. Generally you can sell the company shares after a certain period of time. The 401k plan administrator will be able to tell you how long you must hold them. If you think that the company may be having trouble, you’ll want to consider selling any shares that you 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.

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The employer could go bankrupt and orphan your 401k

There’s one other risk that your 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 (at the time of this writing), 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 contact the Dept. of Labor’s Employee Benefits Security Administration by calling 1-866-4-USA-DOL.

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 401k contributions and risks and manage them if you want to protect your money. But if someone tries to steal your money, it’s still illegal.

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.