Bankruptcy

Employer?s Bankruptcy Could Hurt Your 401(k) Plan

By Wendell Sherk, Missouri Attorney

If your employer goes into bankruptcy, there are a couple ways it could hurt your defined contribution plan (like a 401(k)).

One simple way is obvious:  If you owned the company’s stock in your 401(k), there’s a good chance it’ll be valueless in the long run.  It’s easy to accumulate employer stock if the employer matches your investment with its own stock.

Most financial advisers will recommend you minimize the amount you keep in your employer’s stock anyway.  After all, you have a huge investment in your employer — your career and livelihood for starters — so why also invest your retirement in it?  That’s high risk investing — if it goes well you do well but if it goes badly you lose your job and your retirement.  So diversify away from your employer’s stock as soon as you can.

But there’s another hidden problem that could surprise you and eat even “your” money in your 401(k):  Plan termination costs.  If your employer goes broke, the defined contribution plan may have to be closed down.  In order to do so, the plan administrator has to be paid.  If your employer is broke, who will pay this costs?  You — the current investors in the plan — will.

For example, the employees of Bernie’s stores in Connecticut have discovered that not did their Bernie’s stock become worthless in bankruptcy but they’re losing their own investments in the plan.   The costs of closing down the plan are being charged pro-rata among all the accounts.

So if you want to avoid paying the final funeral bills at your old employer, it may be a good idea to rollover your 401(k) plan to an IRA or a new employer’s plan if bankruptcy is a real possibility at the old employer.  What exactly to do will depend on your situation but doing nothing and hoping for the best may be expensive.

Full post as published by Bankruptcy Law Network on March 09, 2010 (boomark / email).