Ted's Table

TB: Your company isn't permitted to legally use any of the money that is contributed to the 401(k) unless it receives the approval of the Department of Labor. There are around 300,000 401(k) plans and the vast majority are invested in funds managed by large financial organizations. There are very few exceptions.

Several years ago, Color Tile received a lot of publicity when it went out of business. A substantial portion of the 401(k) assets had been invested in stores that were leased back to the company. Participants were unable to get their money out of the plan until these assets were liquidated. The last information I had about this plan was that the participants expected to get most of their money but they had to wait for several years.

If your plan is managed by a large financial organization and if you receive statements from them showing the amount of money that you have invested in their funds, you shouldn't be concerned that the money isn't being managed properly. The assets of the plan belong to the plan, not the company. The plan assets must be used solely to provide benefits to participants. As a result, the company isn't permitted to use these assets as collateral for a loan.

TB: There are a couple of alternatives your client should consider. The first and the best is to hire a good Employee Retirement Income Security Act (ERISA) attorney to advise them. The next is to drop the liability from the corporate books if they don't intend to contribute this amount to the plan. Regarding their W-2s, the amount of Federal income tax they paid should be okay. They will have paid FICA tax on income that was never received, which is better than under-paying their taxes. There could be a compliance problem if the company is audited, but the IRS usually isn't that concerned when officers/owners don't get the benefits they should have received.

Your client needs to keep the plan in compliance in the future, including making all contributions in a timely manner. If this isn't likely, your client should terminate the plan before the company gets into more serious difficulties.

TB: Frankly, I can't answer your specific question without a more detailed explanation of exactly what happened. You indicate that you did something that caused you to lose money. I will assume you moved money from one fund to another. If this is the case, normally participants are fully responsible for the results when they exercise their right to move money from one fund to another. You also use the term "disallowed" and say the rep confirmed that this was a "disallowed move". If the firm that handles the plan allowed you to engage in a transaction that was not permissible, they may in fact have some liability for the results.

TB: Your former employer is legally permitted to require a five-year break before money is released from the plan. Your former employer included this provision in its plan because the law provides that the non-vested amount must be restored to your account if you are re-employed during this five-year period. Plans that reallocate forfeited amounts to other participants commonly keep participant accounts open during this five-year period. Otherwise the non-vested portion of your account would not be available if you are re-employed. There isn't any thing you can do but wait until the five-year period ends.

TB: Despite the fact that the former plan became inactive, you have a right to receive information about your account. Also, if the plan provisions are amended, all participants are to be informed of any amendments. From the information you have provided, you should be concerned particularly since you have so much money in the plan. I recommend asking for a current statement for your account. I would also ask the plan contact what steps must be taken to get your money out of the plan when you retire. If you do not receive satisfactory answers, call the Department of Labor at 800-998-7542. Also consider hiring a lawyer. Don't wait!

TB: Frankly the situations you present each involve different types of risk. The fiduciary standards of ERISA require the employer to select funds considering solely what is in the best interest of the participants. Employees at most companies have very diverse levels of investment knowledge. Selecting specific investment options that are in the best interest of a diverse employee population can be a very big challenge. The options that are selected should be tailored to meet the applicable employee group and the age of the plan. For example, there is a greater need to offer a wider range of funds for an older plan that includes participants who have $100,000-plus account balances than there is with a new plan. A plan that includes primarily low-skilled workers would be hard-pressed to convince a judge that offering hundreds of funds would be in the sole best interest of participants.

An employer seeking the limited-liability protection provided by Department of Labor regulations 404(c) is required to provide participants with sufficient information to make informed investment decisions. This task becomes more difficult as the number of funds increases. It was easy during the early days of 401(k)s, when employees had only two options. Offering a lot of funds increases an employer's investment education liability. However, offering a lot of funds may reduce an employer's liability in other ways. For example, offering three growth funds could result in less performance-related liability exposure than offering just one growth fund.

In any event, the employer is ultimately responsible for the funds that are selected; however, there is much disagreement among professionals about the best way to do this. Many advisors recommend offering enough funds to cover the major asset classes. Using this approach, the funds should be selected by asset class considering historical performance and other applicable factors. The employer should establish benchmarks for measuring performance and should monitor the funds that are selected. Specific fund families don't normally have top-performing funds in all asset classes. As a result, it's increasingly common for mature 401(k) plans to offer funds from different fund families.

Bottom line: my answer to your specific question would be determined by the maturity of the plan, the quality of the funds and the employees involved. For a mature plan with larger account balances, I would recommend 20 funds with five fund families rather than seven funds from the same family. I would also strongly recommend providing an investment advisor to help employees who have difficulty picking their own funds.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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

TB: Your company isn't permitted to legally use any of the money that is contributed to the 401(k) unless it receives the approval of the Department of Labor. There are around 300,000 401(k) plans and the vast majority are invested in funds managed by large financial organizations. There are very few exceptions.

Several years ago, Color Tile received a lot of publicity when it went out of business. A substantial portion of the 401(k) assets had been invested in stores that were leased back to the company. Participants were unable to get their money out of the plan until these assets were liquidated. The last information I had about this plan was that the participants expected to get most of their money but they had to wait for several years.

If your plan is managed by a large financial organization and if you receive statements from them showing the amount of money that you have invested in their funds, you shouldn't be concerned that the money isn't being managed properly. The assets of the plan belong to the plan, not the company. The plan assets must be used solely to provide benefits to participants. As a result, the company isn't permitted to use these assets as collateral for a loan.

TB: There are a couple of alternatives your client should consider. The first and the best is to hire a good Employee Retirement Income Security Act (ERISA) attorney to advise them. The next is to drop the liability from the corporate books if they don't intend to contribute this amount to the plan. Regarding their W-2s, the amount of Federal income tax they paid should be okay. They will have paid FICA tax on income that was never received, which is better than under-paying their taxes. There could be a compliance problem if the company is audited, but the IRS usually isn't that concerned when officers/owners don't get the benefits they should have received.

Your client needs to keep the plan in compliance in the future, including making all contributions in a timely manner. If this isn't likely, your client should terminate the plan before the company gets into more serious difficulties.

TB: Frankly, I can't answer your specific question without a more detailed explanation of exactly what happened. You indicate that you did something that caused you to lose money. I will assume you moved money from one fund to another. If this is the case, normally participants are fully responsible for the results when they exercise their right to move money from one fund to another. You also use the term "disallowed" and say the rep confirmed that this was a "disallowed move". If the firm that handles the plan allowed you to engage in a transaction that was not permissible, they may in fact have some liability for the results.

TB: Your former employer is legally permitted to require a five-year break before money is released from the plan. Your former employer included this provision in its plan because the law provides that the non-vested amount must be restored to your account if you are re-employed during this five-year period. Plans that reallocate forfeited amounts to other participants commonly keep participant accounts open during this five-year period. Otherwise the non-vested portion of your account would not be available if you are re-employed. There isn't any thing you can do but wait until the five-year period ends.

TB: Despite the fact that the former plan became inactive, you have a right to receive information about your account. Also, if the plan provisions are amended, all participants are to be informed of any amendments. From the information you have provided, you should be concerned particularly since you have so much money in the plan. I recommend asking for a current statement for your account. I would also ask the plan contact what steps must be taken to get your money out of the plan when you retire. If you do not receive satisfactory answers, call the Department of Labor at 800-998-7542. Also consider hiring a lawyer. Don't wait!

TB: Frankly the situations you present each involve different types of risk. The fiduciary standards of ERISA require the employer to select funds considering solely what is in the best interest of the participants. Employees at most companies have very diverse levels of investment knowledge. Selecting specific investment options that are in the best interest of a diverse employee population can be a very big challenge. The options that are selected should be tailored to meet the applicable employee group and the age of the plan. For example, there is a greater need to offer a wider range of funds for an older plan that includes participants who have $100,000-plus account balances than there is with a new plan. A plan that includes primarily low-skilled workers would be hard-pressed to convince a judge that offering hundreds of funds would be in the sole best interest of participants.

An employer seeking the limited-liability protection provided by Department of Labor regulations 404(c) is required to provide participants with sufficient information to make informed investment decisions. This task becomes more difficult as the number of funds increases. It was easy during the early days of 401(k)s, when employees had only two options. Offering a lot of funds increases an employer's investment education liability. However, offering a lot of funds may reduce an employer's liability in other ways. For example, offering three growth funds could result in less performance-related liability exposure than offering just one growth fund.

In any event, the employer is ultimately responsible for the funds that are selected; however, there is much disagreement among professionals about the best way to do this. Many advisors recommend offering enough funds to cover the major asset classes. Using this approach, the funds should be selected by asset class considering historical performance and other applicable factors. The employer should establish benchmarks for measuring performance and should monitor the funds that are selected. Specific fund families don't normally have top-performing funds in all asset classes. As a result, it's increasingly common for mature 401(k) plans to offer funds from different fund families.

Bottom line: my answer to your specific question would be determined by the maturity of the plan, the quality of the funds and the employees involved. For a mature plan with larger account balances, I would recommend 20 funds with five fund families rather than seven funds from the same family. I would also strongly recommend providing an investment advisor to help employees who have difficulty picking their own funds.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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.