My 401(k): Is my plan protected?

Add comment August 8th, 2008

  Jerry S. Korabik, CFP®, AIFA®

With all of the negative news the last several months on the sub-prime crisis and the effects it is having on financial institutions, many investors are questioning whether their 401(k) plan is safe.  There are a few ways to describe safe.   

Separate Trust - First, as far as your plan going under because your company has financial problems, relax, you are safe.  Your 401(k) plan is a separate trust not commingled with the general assets of the company.  It is set up for future benefits to be paid to you and your beneficiaries.  Your company cannot touch those vested assets.   

Also note: Your vested assets in the 401(k) are fully protected from creditors in the event of your or your employer’s bankruptcy.   

ERISA Fidelity Bond - The Employee Retirement Income Security Act (ERISA) requires that every “fiduciary” and “every person who handles plan funds” be bonded.  The bonding protects the plan against loss of assets due to “acts of fraud or dishonesty on the part of the plan officials, directly or through connivance with others.”  All ERISA plans are required to have this bonding by law.  Check with your plan administrator if you have reason for concern. 

SIPC and other Professional Insurance - What about protection from the financial institutions that hold my investments?  Financial institutions that custody your plan typically have Securities Investor Protection Corporation (SIPC) insurance and additional insurance against errors and wrongful acts, like professional liability coverages.  The amount of coverage per individual account typically is covered up to several millions of dollars.  This has been a hot discussion point of late with some of the problems in the financial sector.  If you have cause for concern with your assets, again check with your plan administrator to get clarification on how you are protected. 

Market Risk - Finally, is your plan safe from market risk?  That’s a different answer entirely and the answer is “it depends.”  It depends on the quality of your investment options, and whether your plan offers diversified model portfolios.  The only solution for reducing market risk in your portfolio is to self-insure through proper asset allocation.  You cannot eliminate market risk, but you can reduce it and sleep better at night knowing you have a globally diversified portfolio which includes the most efficient investment options available.