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Dr. Don Taylor, CFA, advice columnist 401(k) funds protected by law

Dear Dr. Don,
Given that 401(k)s are established only through companies, are these accounts safe from company bankruptcy, executive looting, mergers and other corporate ethics breakdowns?
-- Erin Egregious

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Dear Erin,
I asked Professor John McFadden, the Robert K. Clark Chair in Executive Compensation and Benefit Planning at The American College, about your question. His comments are below.

Professor McFadden says: "Qualified plan funds are highly regulated and are about as safe as any investment destination can reasonably be. The fund must be held in a trust or insurance contract.

"Company access to the funds is prohibited through stringent federal (ERISA) rules and each plan must make an annual report to the federal government. The funds must have 'fiduciaries,' which include individuals handling funds and the company sponsoring the plan. If there are unlawful losses, all fiduciaries can be personally responsible to restore them. Penalties can also include prison sentences.

"These provisions have been in effect for more than 30 years and nobody in the business thinks that there are any significant loopholes in the protection afforded.

"As for companies holding funds for too long before depositing them in participants' 401(k) accounts, this was an issue in controversy some years ago. It was resolved by Labor Reg. 2510.3-102(a), under which employees' deferrals must be deposited no later than the 15th day of the month following the payment or payroll withholding of the funds. This labor reg is part of the same stringent ERISA regulation scheme referred to earlier, so a company can be severely penalized for not following this rule."

The Department of Labor publication, Protect Your Pension - A Quick Reference Guide, has tips on what you can do to monitor your retirement investments and what to do if things go wrong, but you shouldn't let those concerns keep you from investing in your firm's qualified plan.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy-- Posted: Jan. 26, 2007
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