Ted's Table

Technical Terms Fiduciary Prospectus Rollover

TB: While you are an active employee, access to the money in your 401(k) is limited to the following three reasons:

1. Withdrawals are permitted for any reason after age 59½. A rollover to an IRA is permissible at that time.
2. You may borrow money from your account but the loan must be re-paid. A rollover to an IRA is not possible.
3. Money may be withdrawn for a financial hardship for one of the IRS-approved reasons. A rollover to an IRA is not permitted.

TB: Your employer is required to withhold 20 percent if you take your account as a lump-sum distribution. The only way to avoid this tax payment is to have the money transferred directly to an IRA or another employer's plan. The taxes that are withheld will be deposited to your credit just like payroll taxes that are withheld from your pay. You will get a refund when you file your tax return if you have overpaid.

The fact that 20 percent is withheld should not prevent you from using 10-year averaging if you are eligible to do so.

TB: You ask a reasonable question; but, as you describe your wife's situation, I am not alarmed.

Her money is being deposited within the required time frame. Many employers hold an entire month's worth of contributions and then submit them during the first week after the end of the month. What her employer is doing is pretty good by comparison. A one- or two-week delay really isn't enough to cause major concern.

If this delay started to lengthen, however, I would start to be worried. The Department of Labor requires that 401(k) money be deposited into the custodial account no later than 15 days after the end of the month in which the salary deferral was made. But, the intent of the rule is for employers to deposit the money as soon as possible.

That said, this rule only deals with when the money must be deposited into a custodial account. There is no rule specifying when the investment should be made (after the money is in the custodial account).

I also suggest that your wife check with her employer to see when the money is deposited in the custodial account. That's when the money becomes your wife's asset and is no longer owned by her employer. Also, ask the benefits department to carefully explain the path her money takes to get into her 401(k) account and the reasons for any delays. They should be able to provide some answers.

I understand you may be concerned that this delay may reflect some kind of strategy by her employer to time the investment of deposits with market moves, but, if the plan is run correctly, that shouldn't be happening. The money should be invested regardless of market activity. The employer shouldn't be trying to time the market because that would be a breach of fiduciary responsibility.

Contributions to 401(k) plans are actually used to purchase shares of the specific funds an employee has selected exactly in the same manner as if the individual were buying the shares personally. The only discretion allowed to the fund manager is how much cash to hold to handle redemptions, etc. The fund companies obviously have systems for managing this process. They are also able to use short-term borrowing if they need to do so. Most funds also have clauses in their prospectus that permit them to freeze redemptions and protect the fund from being destroyed by a huge volume of redemptions.

Related Reading Follow the 401(k) Money Trail: Where It Begins, Where It Ends Long Day's Journey into ... Your 401(k) Self-directed 401(k)s Expand Investment Choices

There may be a variety of administrative reasons why it takes a week or two for the money to make it into her investments. For instance, if your wife works for a national employer, it may have many different days that payroll checks are distributed. It may be easier for the employer to wait until all the checks for a particular pay period are issued before forwarding the 401(k) contributions to the plan custodian.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Ted's Table

Technical Terms Fiduciary Prospectus Rollover

TB: While you are an active employee, access to the money in your 401(k) is limited to the following three reasons:

1. Withdrawals are permitted for any reason after age 59½. A rollover to an IRA is permissible at that time.
2. You may borrow money from your account but the loan must be re-paid. A rollover to an IRA is not possible.
3. Money may be withdrawn for a financial hardship for one of the IRS-approved reasons. A rollover to an IRA is not permitted.

TB: Your employer is required to withhold 20 percent if you take your account as a lump-sum distribution. The only way to avoid this tax payment is to have the money transferred directly to an IRA or another employer's plan. The taxes that are withheld will be deposited to your credit just like payroll taxes that are withheld from your pay. You will get a refund when you file your tax return if you have overpaid.

The fact that 20 percent is withheld should not prevent you from using 10-year averaging if you are eligible to do so.

TB: You ask a reasonable question; but, as you describe your wife's situation, I am not alarmed.

Her money is being deposited within the required time frame. Many employers hold an entire month's worth of contributions and then submit them during the first week after the end of the month. What her employer is doing is pretty good by comparison. A one- or two-week delay really isn't enough to cause major concern.

If this delay started to lengthen, however, I would start to be worried. The Department of Labor requires that 401(k) money be deposited into the custodial account no later than 15 days after the end of the month in which the salary deferral was made. But, the intent of the rule is for employers to deposit the money as soon as possible.

That said, this rule only deals with when the money must be deposited into a custodial account. There is no rule specifying when the investment should be made (after the money is in the custodial account).

I also suggest that your wife check with her employer to see when the money is deposited in the custodial account. That's when the money becomes your wife's asset and is no longer owned by her employer. Also, ask the benefits department to carefully explain the path her money takes to get into her 401(k) account and the reasons for any delays. They should be able to provide some answers.

I understand you may be concerned that this delay may reflect some kind of strategy by her employer to time the investment of deposits with market moves, but, if the plan is run correctly, that shouldn't be happening. The money should be invested regardless of market activity. The employer shouldn't be trying to time the market because that would be a breach of fiduciary responsibility.

Contributions to 401(k) plans are actually used to purchase shares of the specific funds an employee has selected exactly in the same manner as if the individual were buying the shares personally. The only discretion allowed to the fund manager is how much cash to hold to handle redemptions, etc. The fund companies obviously have systems for managing this process. They are also able to use short-term borrowing if they need to do so. Most funds also have clauses in their prospectus that permit them to freeze redemptions and protect the fund from being destroyed by a huge volume of redemptions.

Related Reading Follow the 401(k) Money Trail: Where It Begins, Where It Ends Long Day's Journey into ... Your 401(k) Self-directed 401(k)s Expand Investment Choices

There may be a variety of administrative reasons why it takes a week or two for the money to make it into her investments. For instance, if your wife works for a national employer, it may have many different days that payroll checks are distributed. It may be easier for the employer to wait until all the checks for a particular pay period are issued before forwarding the 401(k) contributions to the plan custodian.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.