If you’re concerned that your company is headed for failure and want to make sure your retirement funds don’t do the same, experts say the best thing you can do is to limit your exposure to employer stock in your company 401(k).
On the other hand, old-fashioned “defined benefit” pension plans, in which the employer promises to pay you a certain amount of money every month once you retire, are protected by the Pension Benefit Guaranty Corporation. The PBGC is a federal agency which will pay you at least part of what your company has promised if the company’s plan is underfunded and the employer cannot make good on its pension obligations.
Recently, companies such as United States Steel Corp. (Stock Quote: X), the New York Times Co. (Stock Quote: NYT), and Kimberly-Clark Corp. (Stock Quote: KMB) all stated that 2008's horrid stock market impact on pension assets had eroded their year-end earnings. Employees concerned about traditional pension plans at companies like these can learn more about PBGC’s maximum monthly guarantees here .
But whereas PBGC-backed plans have retained popularity with many employers, overall the number of private defined benefit (DB) pension plans where employers are on the hook for funding and performance have declined rapidly since the late 1970s, and today, an employee is much more likely to have a so-called defined contribution plan such as a 401(k).
With a 401(k), it is the employee who gets stuck with losses when performance declines—not the company—and the employee is usually the one deciding where the money is invested.
"The bottom line is that the money in a 401(k) belongs to the employee, rather than the employer,” says Keith Newcomb, a financial planner at Full Life Financial LLC in Nashville, Tenn.
The good news here is that the financial health of your employer needn’t impact your 401(k) plan in any fashion, unless you have invested a good portion of the plan in company stock and then that stock takes a dive.
Example? Think Enron. By the end of 2000, 62% of its employees’ 401(k) money was in Enron stock. One worker who’d decided to move his whole account from Enron’s long list of investment choices into company stock saw his account balance dwindle to $40,000 from its previous $470,000.
What You Need to Know Now:
Newcomb offers these suggestions to those who worry that their company might be on the ropes:
- If you’re not invested in company stock, take a deep breath and relax: Your 401(k) retirement savings should be entirely secure if they're held by a third-party custodial firm approved by the IRS.
- On the other hand, if you’ve invested your own retirement savings money in your company’s stock, or have received matching funds in company stock, locate your plan document and find out when and how you can switch these funds for a different investment class. Your employer is required to provide you a summary plan document annually. Some companies post their plan documents on their web site. If you can’t find yours, ask the human resources department for a copy.
- Remember, while there may be limits to what you can do with unvested company matching contributions made in employer stock, you should always be able to sell company stock that you’ve purchased with your own money.
- To make sure there is no foul play, look carefully at your paycheck stub and 401(k) statement. Make sure what’s being deducted from your paycheck is being credited to your 401(k). And if there’s something amiss, it isn’t necessarily your employer’s fault. “If the payroll company your employer is using hasn’t been properly depositing your 401(k) contributions," Newcomb says, "you want to take steps to get that money back.” If there are errors, in addition to contacting your employer's HR department, you may also want to consult the U.S. Department of Labor.
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