Is our 401(k) protected? How?

January 18, 2008 7:58 AM

Is our 401(k) protected through ERISA (or anything else) if the institution where funds are housed goes belly-up tomorrow?

Our small business has a (Paychex) 401(k) plan, with funds housed at Merrill Lynch. Employees can choose among about a dozen mutual funds, bond funds, a cash acct, etc. We have an ERISA bond that is renewed triennially.

Does ERISA, or the bond, protect and/or guarantee that employees won't lose their money if the place housing the investments (in this case, Merrill Lynch) goes down the tubes? Our ML rep assures me there's no problem, and that ERISA protects employees' funds. Paychex says they can't imagine that such a risk is really something to worry about...but call me crazy for not trusting those sources.

The references to ERISA I can find suggest employees are protected from the employer's demise. Employees obviously take their own risk regarding the funds they choose to invest in. But what about the financial institution managing/holding the funds?

Any words of assurance? Can anyone point me to the ERISA language that protects employee 401(k) investments in such a situation? (I'm not looking for assurance about ML's financial situation.)

posted by quinoa to Work & Money (9 answers total)

I hesitate to ever use the word 'guarantee', but....

Remember that your money is in the markets. It's in the mutual funds or subaccounts, which are invested in individual stocks, bonds, cash equivalents, etc. Those things (except maybe the cash equivalents... just kidding) have value in the world regardless of how ML is doing.

If ML were to crash and burn, ML would be out of business. The items you own (or the underlying investments) would not automatically become worthless as a result. Your assets would continue to gain/lose value with market fluctuations. Furthermore, ML cannot use your money (or the value of your holdings) to keep themselves solvent. I can't cite anything right now but ML is a fiduciary (under ERISA) who must act in the best interest of plan participants and beneficiaries -- and they cannot engage in transactions for their own benefit.

So if ML were to go away, most likely another financial institution would take over the book of business from them. They might buy the book of business from ML, or they might do some sort of 'rescue'.

Of course, nothing guarantees that you won't lose your money due to market fluctuations.
posted by powpow at 8:58 AM on January 18, 2008 [1 favorite]

Check out the Pension Benefit Guarantee Corporation - it is sort of like the FDIC of the pension world. I can't answer your question specifically, but that would be a good place to start looking.
posted by greekphilosophy at 9:33 AM on January 18, 2008

@Greek, I think the PBGC only covers traditional pension or 'defined benefit' plans. It sounds like the OP just has a 'defined contribution' plan that does not have a guaranteed benefit but I could be mistaken.

However, PBGC is very important to those with DP/pension plans and an employer on shaky ground (the United Airlines pilots a few years ago, for example).
posted by powpow at 11:18 AM on January 18, 2008

Oops, i meant "DB/pension" not "DP"
posted by powpow at 11:20 AM on January 18, 2008

powpow's initial comment matches my understanding, too.
posted by NortonDC at 12:51 PM on January 18, 2008

Check out the Pension Benefit Guarantee Corporation - it is sort of like the FDIC of the pension world. I can't answer your question specifically, but that would be a good place to start looking.

powpow is right, the PBGC only covers defined benefit plans and a 401(k) is the prototypical defined contribution plan.
posted by Falconetti at 1:01 PM on January 18, 2008

Best answer: Merrill Lynch is a member of the SIPC (just about all brokers are). The SIPC doesn't guarantee the value of your securities, but it does provide measures to help ensure your possession of the securities (or may compensate you in the case of fraud).

Also, I found this pamphlet called "Why Your Accounts Are Safe at Merrill Lynch" (pdf).
posted by mullacc at 1:23 PM on January 18, 2008

Response by poster: powpow you're right that this plan is not defined benefit plan - there's no guaranteed benefit

mullacc nice links!

Thanks!
posted by quinoa at 5:45 PM on January 19, 2008

Your money is held in a trust. Merril Lynch is most likely the trustee, though not definitely. You can get a copy of the plan's 5500 which would confirm for sure who the trustee is. Via the 5500 filed with the IRS every year, that trustee must signoff that your money actually exists and that your director of HR hasn't taken off with it and is just sending you a mythical statement.
Beyond that, if your plan has at least 100 people in it, it is going through an independent audit. Likewise, the trustee and recordkeeper (who are usually different arms of one company) have to go through an independent audit of their internal controls. Those are published through a SAS-70.
In short, your 401k plan is one of the most scrutinized financial vehicles you can imagine. There is a lot of tax deferred money sitting in there for you and all your fellow employees. The IRS has a vested interest in making sure that money is there for you to eventually pay taxes on. . .
posted by tsj513 at 9:08 PM on February 5, 2008