When you have significant funds in a 401(k) retirement account, it makes sense to wonder whether those assets are safe. Luckily, 401(k) accounts are protected by federal law in many scenarios.
Here’s how your 401(k) funds may be protected in common cases and which institutions do or do not offer coverage.
How your assets are covered in different scenarios
If you declare bankruptcy
Under federal law, all retirement plans covered by the Employee Retirement Income Security Act (ERISA) include an anti-alienation provision. This means, in general, assets in your 401(k) plan are fully protected from any creditor, even in bankruptcy.
There are several exemptions to this protection with the most common ones being:
In certain divorce cases, where payment to an alternate payee is required under a Qualified Domestic Relations Order.
IRS levy or judgment where the IRS can force a participant to take an allowed distribution from the plan. However, they must follow the terms of the plan and, therefore, cannot force a distribution when you are not otherwise eligible to take one.
Criminal or civil judgments.
When there has been a fiduciary violation or criminal activity.
One of the requirements for creditor protection is that the plan be covered by ERISA. The good news is that a vast majority of Guideline 401(k) plans are covered.
401(k) plans that are “owner only” plans are not covered by ERISA and cannot take advantage of the ERISA creditor protection. An owner-only plan is one where the only individuals eligible to participate under the terms of the plan are the owner and their spouse (if applicable). However, this does not mean that they are fully open to creditors; instead protection will be determined under the state laws in effect for that company. Note that while “owner only” is the most common generic term and the IRS sometimes uses the term one-participant plan, these are often referred to using different trademarked names such as Solo(k), Individual(k), I(k), Indy(k), and uni(k).
If your employer goes out of business or declares bankruptcy
Under federal law, all retirement plans covered by ERISA must deposit all assets of the plan in a trust with the assets held in either a bank or other organization authorized by the IRS to hold plan assets. Therefore, if the employer sponsoring your plan either goes out of business or declares bankruptcy, any assets that have been deposited will be fully protected. Neither your employer nor their creditors have the right, or ability, to take your assets from the plan’s trust account.
However, it’s important to note that you may not be able to take a distribution (even if you are eligible for one) for a while, as Guideline either works with your plan sponsor to terminate the plan or, if necessary, the Department of Labor if your plan sponsor is unresponsive.
The only exception to this protection is for any contributions from you or your employer that were not deposited before your employer declared bankruptcy. If there are amounts due, the plan will be listed as one of the creditors due payment through the bankruptcy. Whether these amounts will eventually be deposited into the trust will depend on the assets your employer has to repay creditors and the priority of the creditors that may get paid before the plan. At this time, employee contributions withheld from your pay but not submitted to the plan are not considered unpaid salary and are lumped together with all other creditors under bankruptcy law.
If Guideline goes out of business or declares bankruptcy
While Guideline expects to be in business indefinitely, no one can predict the future. If, for some reason, Guideline must wind down business, we will work with your employer to transfer the plan to another qualified service provider.
In the unlikely scenario that Guideline does not have an opportunity to transfer your plan, funds will continue to be held by the plan’s custodian, Benefit Trust Company (BTC). BTC is a privately-held, independent trust company with over $14 billion in assets under management.
If assets are mismanaged by Guideline or the plan sponsor
In addition to the processes, procedures, and safeguards Guideline has in place to protect all plan assets, we also carry an ERISA bond that protects all plan assets under Guideline’s control that protects those assets from any negligent action by Guideline or its employees. In addition, your plan sponsor may also have coverage that protects plan assets from negligent actions by them or their employees.
Which institutions cover employer plan assets?
Pension Benefits Guarantee Corporation (PBGC)
The Pension Benefits Guarantee Corporation is a quasi-governmental
organization that provides insurance for pension plan assets. Covered plans pay insurance premiums to the PBGC, so it is operated outside of the normal federal governmental budget process. However, the PBGC only covers traditional pension plans, such as defined benefit plans. This means that your Guideline 401(k) plan is not covered by the PBGC.
Other types of coverage
Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation, commonly known as the FDIC, provides insurance for customers of depository institutions, such as banks. While FDIC insurance will protect cash or cash equivalent accounts, securities, like stocks, bonds, or mutual funds are not protected. 401(k) plan cash, the assets in your 401(k) account that are in cash or a money-market-like accounts, are aggregated at an omnibus level at the custodian for all 401(k) plans record-kept by Guideline, and combined, would be insured under the FDIC, up to the current maximum limit.
Securities Investor Protection Corporation (SIPC)
Securities Investor Protection Corporation (SIPC) insurance protects against the loss of cash and securities held by customers at SIPC-member brokerage firms. SIPC only protects the custody function of the broker-dealer, which means that SIPC works to restore customers’ securities and cash that are in their accounts if a brokerage firm liquidation begins. Guideline 401(k) plans, as well as our SEP IRA/IRA accounts, are not brokerage accounts and any invested funds are held with Vanguard directly. As such, funds that are invested in your Guideline account are not insured by SIPC.
It’s important to note that FDIC and SIPC insurance only protect assets from fraud or financial failure of the bank or brokerage firm. There is no insurance that will cover your 401(k) plan assets for investment losses.