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Dealing with an orphaned 401(k)

Imagine what it would be like if you couldn't access your 401(k), couldn't get any information about it, change your investments or receive a distribution. Imagine being totally cut off from your retirement lifeline.

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"We made this a national enforcement project in October 1999," says Smith. "We saw this as a problem that was occurring all over the country and needed attention.

"Normally, people don't abandon plans on purpose, although they do sometimes. Often the company goes bankrupt and the plan falls through the cracks. The owner may have died. We've seen fiduciaries that have ended up in jail and, certainly, they can't handle the plan from jail. We've seen them flee the country, and we've sometimes been able to bring them back."

Predominately, it is small-company 401(k) plans that meet this fate. Too often the owner, who is the fiduciary, doesn't have the necessary knowledge to properly oversee the plan.

A recent small business survey sponsored by Nationwide Financial shows that many small business owners don't even realize that they hold primary fiduciary responsibility. According to the survey, "more than 40 percent incorrectly identified the plan investment provider, the financial professional, and even employees as fiduciaries."

"For small and large businesses, this is a complex area," says Michael Butler, senior vice president at Nationwide Financial.

"There are people who make full-time careers dealing with it. They're really spending a lot of their time building their core business and trying to make it successful. They don't have to be an expert to offer a 401(k), but we talk with them about linking up with a good adviser."

While an orphaned 401(k) plan is distressing for participants and beneficiaries, there is comfort in knowing the plan assets are protected.

"The assets are in a trust, not subject to creditors, and under the control of a reputable third party administrator," says Rick Meigs, president of 401(k) Help Center.

When the fiduciary and sponsor of a plan walk away without filing the necessary papers to terminate the plan and distribute its assets, it can take a while before anyone notices. Very often it's not until a former employee tries to contact the plan to begin receiving retirement distributions.

"The most common way we find out that there is an orphaned plan is when a participant calls us," according to the DOL's Smith.

"A scenario I often hear," says Meigs, "is they reach the third party administrator who refuses to tell them anything or allow them to take out their money because the plan hasn't paid any fees."

When a plan has been abandoned, the DOL may try to find an independent fiduciary to manage the plan. The faster that happens, the better.

"When we find out about the problem we try to locate the fiduciaries," Smith says. "Sometimes we're successful and then we have them take the appropriate steps they should have taken to distribute the plan assets.

"If we can't find them we may go to court to have a fiduciary appointed to take over the distribution of the plan assets. Since 1999, we've succeeded in getting about 75 independent fiduciaries appointed. Most cases we can resolve without doing that."

Unfortunately, it's not uncommon for years to pass from the time a company goes bankrupt to when the DOL first hears about the orphaned 401(k). There are a couple things employees can do to improve the odds that DOL officials will find out about the abandoned plans as quickly as possible.

Matt Gnabasik, managing director at Chicago-based Blue Prairie Group, a human resources consulting firm, says employees should pay attention to the company's financial situation. If things are going sour, don't hesitate to ask questions.

"Talk to management. Ask about the retirement plan. If that doesn't work, that's why the DOL is there. Tell them the company is going under and you want to make sure you have access to your money."

Corporate financial problems may not always be obvious. Be alert to layoffs and other cutbacks that indicate the company is in a bind. You can't take control of your 401(k) until you quit your job, but you don't want to make that drastic move unnecessarily.

"A lot of companies tighten their belt. You don't want to freak out at the first sign of belt tightening," says Gnabasik.

"In a perfect world, a company says to the employees, 'Guys, things are bleak.' But the minute management says that they may lose employees, so there's a tension about disclosing the information. It may facilitate the death cycle of the company."

The other thing you can do is keep track of your 401(k) if you leave it with the old company. Don't make the mistake of abandoning your own plan and then trying to track it down years later when you want to start taking distributions.

The best advice to just about anyone who leaves a company is to take your 401(k) with you. Rolling it over into an IRA puts your retirement fund in your control and relieves you of wondering if all of the companies you worked for are still up and running. But if you insist on leaving it with a former employer, make sure everyone concerned has your new address if you move.

If you have any concerns relating to a private-sector 401(k) plan, call DOL's Employee Benefits Security Administration at 1-866-444-EBSA (3272).

-- Updated: April 18, 2005




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