How safe is your 401(k)?

Investors hate surprises, and in the past few years, we’ve had more than our fair share courtesy of a hyper-volatile stock market.

The fiscal cliff is just one problem facing the U.S. right now. Back in the summer of 2011, members of Congress discussed the possibility of the U.S. government defaulting on its debt. Sometime in the first quarter of 2013 the country will again hit its “debt ceiling.”

This talk of massive government spending cuts, tax increases, and the possibility of default strikes a nerve with some 401(k) investors about the safety of their retirement assets.

Because qualified retirement plans – pension, profit-sharing, and more recently 401(k) – have been around a long time and often hold large amounts of money, history shows that too often they have been the target of abuse or neglect. So it is important to know they are now the most heavily regulated and closely protected assets under the law.

We can thank the demise of the Studebaker Motor Co. and the questionable business dealings of Jimmy Hoffa Sr. for this added protection and closer scrutiny.

When Studebaker filed for bankruptcy and disappeared in the 1960s after more than 100 years in business, some of its employees’ pension assets vanished along with it. At the time, plan participants had no remedy to recoup their lost benefits.

Around the same time, Hoffa was using the pension assets he controlled for the Teamsters union to gain personal wealth and influence by helping businessmen with questionable backgrounds build casinos in Las Vegas. Again, there appeared to be nothing illegal about what he was doing.

As a result of such activities, Congress passed the Employee Retirement Income Security Act, known as ERISA, to safeguard qualified retirement plan assets. The bill was signed into law by President Gerald Ford on Labor Day in 1974.

ERISA’s protections

ERISA requires when your 401(k) contribution is withdrawn from your paycheck that the funds be deposited in a trust account, separate from your employer’s assets and separate from any financial institution’s assets.

This requirement protects you in the event your employer, or the financial institution that holds your retirement assets, runs into financial trouble.

This rule also protects 401(k) savings if you find yourself in the unfortunate circumstance of filing personal bankruptcy. This risk has always been an issue for business owners and professionals subject to malpractice lawsuits, but more people are benefiting from this protection in today’s difficult real estate market.

There are two creditors, however, that even ERISA cannot protect you from: the IRS and a former spouse. The law states that if you owe either of these parties money, they can collect by a forced liquidation of your 401(k) account.

Employers’ duties

ERISA also put in place a number of rules designed to protect retirement plan participants against the careless or self-serving actions of those who control plan assets.

The duty of loyalty – which is the duty to put plan participants’ interests first – means those with control over plan assets, and those who give them advice, are not allowed to financially benefit from the decisions made about where to invest plan assets.

This has eliminated much of the backroom dealings that made the Hoffa case so scandalous.

Another duty created by ERISA, to invest plan assets “prudently,” protects against the careless handling of your hard-earned retirement savings. Once your retirement assets are deposited in a separate trust account, ERISA requires they be properly invested.


ERISA defines a “prudent” investment as one that uses the highest standard of care for handling other people’s money – what an “expert” would do given similar circumstances. This differs from rules that govern other third-party investment decisions that only need to meet a test for reasonableness or suitability, far lesser standards of care.

While this high standard of care does not ensure that plan fiduciaries are always going to select top-performing investments, you can take comfort knowing that, if something goes wrong, industry experts will review an employer’s investment decisions to determine whether the decisions were prudent at the time.

Safety is always a priority when it comes to your retirement assets. ERISA governs and protects the trillions of dollars invested in 401(k) plans by establishing procedures and duties that must be followed by those overseeing 401(k) plans, or they risk being found personally liable for any losses that result.

While ERISA won’t take the volatility out of the stock market or protect the value of U.S. bonds, it should give you confidence the money you’ve saved for retirement is properly safeguarded.

Michael J. Francis is president and senior investment consultant of Francis Investment Counsel, LLC, a registered investment adviser based in Pewaukee. He can be reached at

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