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The shortest distance between two points
may be a straight line, but the path your 401(k) money takes before it gets to your
account sometimes has a few twists and turns.
If you're not checking to see if your
deferral amount and investment choices are being followed, you should be. Correcting
mistakes can be costly and time-consuming.
A few months ago, one of Billie Moore's co-workers quit her
job. As the woman left, she happened to tell Moore, 52, that she was withdrawing the
$35,000 from her 401(k) plan.
The pair had been working for the same employer for about
eight years. Moore, an office manager, knew she earned more than this woman and
contributed more to her 401(k). Yet, the woman leaving had a bigger balance. Moore
wondered why.
Looking closely at her 401(k) statements, she found that
all of her contributions were being invested into a money market account. That's not how
she recalls setting up her account.
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| Protect Your Investments |
| Read more about Billie
Moore's story and get a few tips on keeping up with your 401(k) accounting. |
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"I remember when I originally allocated, it was 50
percent stock and 50 percent in a money market account," Moore said. "I should
have at least $40,000 in there."
She pointed out the discrepancy to her human resources
department and hopes a way can be found to make up the difference.
Moore's experience offers an opportunity to look at the
path your payroll contributions take to go from your paycheck to your 401(k)-plan account.
Payroll Deduction
Billie Moore's troubles likely began at the first step of
this process, enrollment.
The data you enter on your enrollment sheet indicates how
your money is to be handled. The sheet includes two key bits of information: how much
money you want to defer and how you want that money invested.
In Moore's case, she can't find a copy of her enrollment
form, and neither can her employer. The two are waiting to see if the 401(k) administrator
can find the original enrollment form to verify her suspicions.
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"A lot of people read that it's
okay to take up to 15 days (after the end of the month), that's not what the DOL position
is."
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| — Ted Benna,
creator of the first 401(k) plan and president of the 401(k) Association. |
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Once you've filled out your enrollment form, your employer
puts together all the deferral and investment data and sends it to the trustee who
oversees your 401(k) plan. Depending on the arrangement your employer has with the plan
trustee, it could take from a day to several weeks for your money to reach the 401(k)-plan
trust account.
401(k) Trustees
When you save in a 401(k) plan, all contributions must be
held in a trust account. The law requiring the trust is the Employee Retirement Income
Security Act (ERISA), established by the Department of Labor (DOL) to protect employee
benefits, including pensions, healthcare, and 401(k) plans.
Your employer sets up this account, but the trustee is
responsible for protecting your interests. This trust account protects your assets in the
event that something goes wrong with your employer, such as declaring bankruptcy.
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| Saving Tip |
| You can boost your 401(k) savings by
deferring a percentage of salary rather than a fixed dollar amount. This means that every
time you get a raise, your deferral increases. If you select a fixed dollar amount to
defer, you will have to remember to raise your deferral to keep up with any salary
increases. |
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The trustee must comply with the rules of your employer's
401(k) plan and federal laws. Your employer can't use your money to pay for a trip to
Tahiti. You, on the other hand, either need to be retiring or making an IRS-approved
hardship withdrawal to access the money.
Data Scrub
The data about your deferral and investment choices is sent
to the trustee each time paychecks are issued.
While this may seem like a mind-numbing task, there can be
a fair number of changes between each paycheck: new hires, employee terminations, a change
in investment choices, etc.
One reason it sometimes takes a day or two after you get
your paycheck for 401(k) contributions to make it into the trust account is that the
trustee, payroll company and employer run a "scrub" on the contribution data to
make sure it's correct, says Ted Benna, the creator of the first 401(k) plan and president
of the 401(k) Association.
"We have tens of millions of people in the system and
hundreds of millions of transactions. Everything has to be exquisitely correct," said
David Wray, president of the Profit Sharing/401(k) Council of America. "The
consequences of unwinding a mistake are immense."
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"We have tens of millions of
people in the system and hundreds of millions of transactions. Everything has to be
exquisitely correct."
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| — David Wray,
president of the Profit Sharing/401(k) Council of America. |
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After all, an error could mean you have too much or too
little deducted from your check, or the money goes into the wrong accounts.
Think of it this way: If it's proved that Moore's money has
been improperly invested for seven years, it could cost her plan trustee thousands of
dollars to correct the mistake.
"The data scrub is usually done within a day. If there
are problems, (the data) goes back to the employer," Benna said.
Once the data is scrubbed, the money is often immediately
wired to the trust, said Bob Francis, president of corporate markets for Aetna Financial
Services. The money becomes your property and is no longer an asset of your employer.
Currently, the law states that an employer may take up to
15 days after the end of the month in which your payroll deduction was made to deposit
your 401(k) money into the plan trust.
While that's the maximum allowed, the DOL, which oversees
ERISA, expects employers to deposit your money into the trust as quickly as possible.
The DOL enforces this rule by running audits of 401(k)
plans. If the auditors see a pattern of late deductions, they must be justified, Wray
said.
"It's not unusual for plans to make contributions once
a month. That is accepted practice," Benna said.
Investment
Okay, so your money goes to your trustee fairly quickly
after you get your paycheck. But, you may ask, "Why does it seem to take so long for
my money to be posted to my account?"
There are two methods commonly used in 401(k)-plan
accounting: daily valuation and balance forward.
With daily valuation, the trustee holds the money in
individual accounts for each 401(k)-plan participant. Your 401(k)-plan balance is updated
every day to reflect the changing values of your mutual funds.
It's possible for contributions to be invested in the right
funds within a day after the trustee gets the money, Francis said.
With employees wanting to take a more hands-on approach to
managing their retirement, "the norm today is daily valuation," Francis said.
If your employer uses what's known as a balance-forward
system, it can take a month or more for your money to be invested. With this system, your
money is pooled with all the other participants' money in your 401(k) plan. The trustee
waits until a fixed time — the end of the month, the end of the quarter, the middle
of the year — to invest your money. In the meantime, your money is placed into a
money market account until the investment date arrives.
Many employees get upset when they realize that their money
may be sitting in the 401(k) trust waiting to be invested. Many also want to know what
happens to the interest it earns during this time.
Often it's too complicated to divvy up the interest
payments to each employee's account, Benna said. Some employers use the interest payments
to offset 401(k)-plan management fees.
Many employers have discontinued using balance-forward
accounting because it's too complicated to explain to plan participants, said Trisha
Brambley, president of Resources for Retirement Plans, Inc. "Balance forward is going
the way of the dinosaur," she said.
Balance-forward accounting systems tend to be used by old
plans with smaller employers who haven't had the time or money to update their 401(k)
plans.
Loans and Withdrawals
If you have a loan on your 401(k), every time you get paid,
your employer deducts a portion of your money to repay it. This data is included in the
information sent to the 401(k)-plan trustee. Loan payments generally follow the same path
as regular contributions; however, the plan administrator must also update the loan
account to credit interest and principal.
One thing you should realize is that loan payments are
reinvested at the same proportion as your regular deferrals.
When you are ready to retire, withdrawing money can be a
relatively straightforward process if your employer uses a daily-valuation accounting
system. You could have a check within a week or two.
But, if your employer uses a balance-forward system, you
will have to wait until your company's accounting cycle is completed.
"If it's a balance forward, you have to wait until the
(accounting cycle) date to get an account value and then the check could take another four
to eight weeks to get into your hands," Brambley said. |