Could Your 401K Company Go Broke?

With layoffs sweeping many companies, including the 401(k) industry, you might be more worried about losing your job or losing the value in your 401(k) portfolio than you are about the staff of your 401(k) fund. But here’s something you might not have thought of: cutbacks also affect your 401(k) fund managers, as well as the people in your own company who keep records and pick stocks and funds for your company’s 401(k) to invest in. Despite bailouts of major investment brokerages, fund houses are going out of business right and left. Should you worry about your 401(k) company going broke?

First, it’s important to understand that – though the value of your 401(k) stocks may plummet in the general stock market downturn – the possibility of your 401(k) plan itself going broke is, according to most experts, very unlikely. Your 401(k) plan is an entirely separate entity, legally speaking, from the company that sponsors it. What this means for you is that even if your company goes out of business, the 401(k) plan as an entity is protected.

But what if the fund house goes out of business? In that scenario, the plan assets – i.e., the money that your plan invests on your behalf – will still come back to you, including any money that his been contributed to the plan through company matching funds (subject to whatever vesting rules might apply). If a fund goes out of business, its assets are liquidated and you will get money back, even if it is less money than you originally invested. The value of the stock you get back will be market value, so if the market value is less than it was when you invested in the stock, you may lose money in that regard.

Should you pull out of your 401(k)? Experts advise against it, as 401(k) plans enjoy excellent protection under federal law, and unlike IRAs, are protected from creditors. Also, the Supreme Court recently ruled that individual plan participants may file individual lawsuits in the event of plan abuse.

The best course, experts agree, is to keep a close eye on your plan and make sure that you know where your money is going and how it is performing.

Here are a few warning signs to look out for and ways to fail-proof your 401(k) portfolio:

First, are you experiencing any delays in transferring contributions into plan investments? A delay over seven days is beyond the court-defined limit, and is a definite red flag of poor performance and poor service. If it’s taking more than a couple days for your contributions to be transferred, you should complain immediately.

Second, is your 401(k) mostly invested in stock from your own company? This is a quite common scenario and it is considered unwise to put all of your investment eggs, as it were, in one basket. Experts suggest that you sell your company stock down to the very minimum allowed by the plan. Even if the price is currently depressed by the market, diversifying can only strengthen your portfolio. If your livelihood and your retirement are both tied primarily to one company, you risk losing both at the same time.