401(k) risk

[Roozbeh]

I ran into this article on New York Times today:
http://www.nytimes.com/2012/08/26/busin ... -game.html

Now I'm wondering what's the risk of keeping money in a 401(k) and how do you measure it? Should one convert or rollover the money out of the 401(k) (or it's brethren, 403(b), 457(b), etc) as soon as one can? Even if it has lower costs than what you may get in an IRA? (That happens to be the case for us, since we get institutional funds in our 401(k) et al.)

[Johm221122]

Intresting and scary, thanks for sharing that


John

[pkcrafter]

I'd have said something like this would never happen. Unbelievable. Law suit, anyone?

Paul

[scone]

I ran into this article on New York Times today:
http://www.nytimes.com/2012/08/26/busin ... -game.html

Now I'm wondering what's the risk of keeping money in a 401(k) and how do you measure it? Should one convert the money out of the 401(k) (or it's brethren, 403(b), 457(b), etc) as soon as one can? Even if it has lower costs than what you may get in an IRA? (That happens to be the case for us, since we get institutional funds in our 401(k) et al.)

The risk isn't with the 401k, it's the company, and the potential for bankruptcy. And that's not so easy to measure. How many securities analysts have given "buy" recommendations on stocks just before the company went bk? That said, the delay seems to be caused by a backlog at the Federal level, so if I were in this situation, I'd call my Congressman. Not with much optimism that it would help, but just to cover every possibility.

As for converting, Moving the 401k to a Roth can be great, or actually cost you money, depending. There are simulators you can run on the net to get an idea.

[livesoft]

This recent thread shows a case where this has happened to forum poster Alskar: http://www.bogleheads.org/forum/viewtop ... 1&t=100868

[Watty]

With many, but not all, 401k planes you can do an "in service non-hardship withdrawal" when you are 59.5 years old. This allows you to roll the money out of the 401k to an IRA without paying any penalty or interest while you are still working for the company.


In addition to getting better investing options this would also help to avoid this situation. I plan allows this and I plan on doing this the first day that I can.

[digit8]

Even putting the best face on things and assuming this is all innocent, mindless bureaucratic anti-inertia,it's ugly.There are some great on-paper logical arguments for making a 401(k)(or IRA, or 403b, etc) ones sole point of investment. But stuff happens, for whatever reason.

[Muchtolearn]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

[bb]

I don't see how it is posible to read that article and not get angry.

[Ranger]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

[downshiftme]

This seems like a horrifying scenario - and much more risk than any simple asset allocation decision. Is this an example of why diversification of different accounts and custodians would be prudent. Someone with a few years of contributions in this 401k and most of their money in other IRA accounts is in a very different position than someone with virtually all their retirement money tied up with this.

[Muchtolearn]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

I see. So they have no responsibility? They should just cut a check for all of the assets of a person to an administrator if requested? One can play Sargeant Schultz or one can sometimes use some discretion and even show courage at times. We can disagree but I am very disappointed. They now on on notice as knowing what is going on so I am hopeful they will refuse future requests.

[Sam I Am]

Message deleted.

[damjam]

From the article:

My next call was to Mr. Miller, the trustee. I asked why this was taking so long. He expressed little sympathy for the account holders. He said he had not heard back from the I.R.S. on his request to terminate the company’s 401(k) in the summer of 2009.

“We do everything by the book,” he said. “We filed the paperwork timely, and we’re waiting.” He added that distribution delays like those experienced by Penn Specialty account holders were pervasive among small-company 401(k) plans. “I have at least seven or eight in this status,” he said.

So he has several 401ks in this situation. Maybe he likes to drag things out to extract more fees. Or maybe not, no way to know from this article.

Older account holders could become subject to substantial tax penalties because they can’t take distributions, as required by law.

I do hope the IRS will wave any penalty. However recently the IRS indicated that it would be enforcing rules regarding IRAs more strictly, perhaps they will target 401k compliance issues as well.

A nightmare scenario, no doubt.

[Alskar]

I'm involved in a similar, but less disastrous situation with a 401(k) at my previous, now defunct employer.

At the end of February 2012, a deal for the next round of venture capital funding for the solar energy start-up I worked at fell through at the 11th hour. On Monday it appeared that the next round of funding was going to go through. On Tuesday at 10:00AM we were all called into a conference room to be told that the deal fell apart and Wednesday would be the last day of operation. Such is life in the world of high-tech start-ups.

It took me a few days to realize that I never received termination paperwork. It turns out, that from a legal point-of-view, we were all furloughed not terminated. As such, I was not eligible to rollover my 401(k). When further attempts to get funding fell through, we were all terminated March 21th.

I went to do the rollover, but discovered that there was a 60 day early redemption penalty on one of my funds (VTSGX) so I held off for a few weeks so I wouldn't have to pay the penalty...huge mistake! As it turns out Vanguard had eliminated the redemption penalty on this fund earlier in the year, but the plan record keeper (Employee Fiduciary) hadn't updated their website with this information yet.

By the time the redemption period had expired, my previous employer had submitted paperwork to have the plan terminated so my rollover was put on hold. That was April 30, 2012. I've been waiting for my rollover ever since. Meanwhile they continue to withdrawal management fees.

I filed a compliant with the EBSA when my distribution went over the 90 day statutory limit. The very nice agent from Seattle office of the EBSA told me that in the case of plan terminations they have 1 year to distribute the funds. She called Employee Fiduciary with me on the line. The very rude EF customer service person said the funds would be dispersed in 2-3 weeks. This is what EF ALWAYS says...2-3 weeks.

EF now tells me that they sent the check to Vanguard 10 days ago. It has not shown up in my account.

The morale of the story: Get your money out of a 401(k) plan at the earliest possible moment after leaving an employer. Ignore comments about there being "protection" for your funds or there being a "firewall" between the company and your money. If you need further convincing, have a look at the press releases from the EBSA: http://www.dol.gov/ebsa/newsroom/main.html. If you still don't believe that the "firewall" has holes have a look at count 12 on page 4 of this judgement: http://www.dol.gov/ebsa/pdf/3-11-cv-00071-DCR.pdf

I pledge to never ever trust a 401(k) plan again.

[Ranger]

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

I see. So they have no responsibility? They should just cut a check for all of the assets of a person to an administrator if requested? One can play Sargeant Schultz or one can sometimes use some discretion and even show courage at times. We can disagree but I am very disappointed. They now on on notice as knowing what is going on so I am hopeful they will refuse future requests.

As a bookkeeper, they have signed legal contract with the administrator, not with employees. If they show discretion, they will sued for violating legal obligations. Fiduciary responsibility lies with the trustees. ERISA, which has all the powers to enforce fiduciary responsibility has failed here. Vanguard will be on thin ice, if they start to enforce their own views violating written contract ( in my non lawyer opinion ofc)

[digit8]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

+1, assuming we're understanding correctly.

A financial institution that would actively refuse to follow a law or contract- even a bad one- is not one I'd hand my money to. It's simply not an appropriate arena for civil disobedience.

[Muchtolearn]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

+1, assuming we're understanding correctly.

A financial institution that would actively refuse to follow a law or contract- even a bad one- is not one I'd hand my money to. It's simply not an appropriate arena for civil disobedience.

I do not believe that there is a law that a custodian must follow instructions without asking questions about something that may be wrong. Do you remember the heat that JP Morgan got for not being sure that the MF global money was being used properly? And they at least tried to check. Just because one isn't legally required to do something (I am not required to call the police if I am witnessing murder) does not mean they shouldn't, especially when alerted to the situation. The type of firm I would like to do business with is exactly one that would question things that might go wrong, not one that does things by the book at all times.

I reiterate my question: should Vanguard cut a check for administrative fees to a firm requesting 100% of the asset balance of a participant?

[Ranger]

JPM and MF global relationship vs Vanguard and small business 401k are not even in the same ball park.

JPM was MF's Prime broker, creditor (both secured and unsecured), Repo agent, I banker and was dealing with lots of grey areas in CFTC, I banking leveraged world. Where as ERISA laws are broiler plated. As with any bookkeeper, they just enforce what is written in the contract.

Yes, if the contract specifies that they should abide by the trustee decision, then they should. Even if it is 100%. They can always report to the related authorities, but they have no authority to withhold the payment. In this case ERISA has had 4 years to act upon it, they still haven't.

[KyleAAA]

It sounds like everybody has done their job properly except the government in approving it and Vanguard. The fees that have been extracted are ridiculous. I am not surprised at government inefficiency, we all live with that. But Vanguard hiding behind the idea that they must comply with the plan administrator? Even if the actions are inappropriate? What if the administrator put in a request for 100% of each participant's assets? Vanguard should have refused to comply and required a court order to pay those people demanding the fees.

I disagree. Vanguard is just a bookkeeper. Yes, if the trustees are stupid enough to take fiduciary risk of ordering 100% asset in fees, Vanguard has to comply.
I place blame squarely on toothless ERISA in this case

+1, assuming we're understanding correctly.

A financial institution that would actively refuse to follow a law or contract- even a bad one- is not one I'd hand my money to. It's simply not an appropriate arena for civil disobedience.

I do not believe that there is a law that a custodian must follow instructions without asking questions about something that may be wrong. Do you remember the heat that JP Morgan got for not being sure that the MF global money was being used properly? And they at least tried to check. Just because one isn't legally required to do something (I am not required to call the police if I am witnessing murder) does not mean they shouldn't, especially when alerted to the situation. The type of firm I would like to do business with is exactly one that would question things that might go wrong, not one that does things by the book at all times.

I reiterate my question: should Vanguard cut a check for administrative fees to a firm requesting 100% of the asset balance of a participant?

Absolutely they should. The chances of a fiduciary getting away with this are less than 0%, so there's no real danger and it would never come up.

[fcirullo]

Apparently, there is a serious problem in the process used by the Rapid ERISA Action Team (REACT). At the U.S. Department of Labor's Web site it says this: "Under REACT, when a company has declared bankruptcy EBSA takes immediate action to ascertain whether there are plan contributions that have not been paid to the plans' trusts, to advise all affected parties of the bankruptcy filing, to provide assistance in filing proofs of claim to protect the plans, the participants, and the beneficiaries, and if necessary, to seek the appointment of an independent fiduciary to distribute plan assets to participants and beneficiaries."

Well, it was in December, 2008, that Penn Specialty filed for Chapter 7 bankruptcy — liquidation, and nothing has been resolved. The REACT project was begun in 2001. http://www.dol.gov/ebsa/newsroom/fsREACT.html

Obviously, the IRS and the U.S. Department of Labor and Employee Benefits Security Administration (EBSA) have work to do on how they process companies that have a 401(k) plan and file for Bankruptcy!

[DanielBrown]

Wow – thanks for the post. I’m taking my money out as soon as I can.

[jpsfranks]

It's sounds as though this situation has finally been resolved.

http://www.nytimes.com/2014/02/02/busin ... 401-k.html

Whereas the previous article lays a lot of the blame on government bureaucracy, the version in the update makes the plan trustee sound much shadier. The following is an interesting tidbit:

The fees went to the overseers of the plan — Mr. Miller and a consulting firm in Melville, N.Y., called the Comprehensive Consulting Group. But in 2011, Vanguard, the plan’s record keeper, stopped paying the overseers after receiving what it said were unsatisfactory answers to questions it had asked about the delays in paying out participants.

Although the 2011 date when Vanguard supposedly stopped paying the overseers predates the previous article which seemed to indicate that fees were still being deducted.

In any case, it's disgusting what these plan participants had to go through to access their own money. Navigating retirement is complicated enough without this kind of BS.