Smart 401(k) Investing—Special Features of Your 401(k)
Dealing with Creditors
If you're in debt, or if you get divorced, your creditors or your former spouse may want a share of your 401(k) plan assets. Their rights, and yours, are spelled out in the law. If you’re in debt, your creditors—businesses, family or governments—may try to collect what you owe. But whether or not they will be able to force you to liquidate your 401(k) assets to meet your obligations depends on who they are, and the legal routes they take.
It’s generally true that your 401(k) is safe from commercial and professional claims—such as car repair bills or legal fees—whether you’re sued in either federal or state court. That’s because the federal ERISA law, which governs all 401(k) plans and supersedes state laws governing retirement plans, protects your money from these creditors. You won’t be ordered to withdraw from your plan to pay now, nor can your account be frozen until you pay the debts.
For the most part, you cannot be forced to use your 401(k) money to pay state and local income, property or other taxes. However, if you owe child support, alimony or federal income taxes, a court may order you to withdraw money from your 401(k) to pay those debts. Because state and federal laws differ, you may want to seek legal advice to be sure which will apply.
If you change jobs or retire and want to be sure that protection continues, you may want to consider leaving your assets in your former employer’s plan or rolling them into an individual retirement account (IRA). Cash you withdraw is no longer safe from claims against you, though IRA assets are.
Dividing Your Assets
If you divorce, your former spouse may be entitled to some of the assets in your 401(k) account or to a portion of the actual account. That depends on where you live, as the laws governing marital property differ from state to state.
In community property states, you and your former spouse generally divide the value of your accounts equally. In the other states, assets are typically divided equitably rather than equally. That means that the division of your assets might not necessarily be a 50/50 split. In some cases, the partner who has the larger income will receive a larger share.
For your former spouse to get a share of your 401(k), his or her attorney will ask the court to issue a Qualified Domestic Relations Order (QDRO). It instructs your plan administrator to create two subaccounts, one that you control and the other that your former spouse controls. In effect, that makes you both participants in the plan. Though your spouse can’t make additional contributions, he or she may be able to change the way the assets are allocated.
Your plan administrator has 18 months to rule on the validity of the QDRO, and your spouse’s attorney may ask that you not be allowed to borrow from your plan, withdraw the assets or roll them into an IRA before that ruling is final. Once the division is final, your former spouse may choose to take the money in cash, roll it into an IRA or leave the assets in the plan.
If there’s a cash settlement, income taxes will be due on the amount that’s taken out of the account. If your spouse gets the money, he or she is responsible for paying that bill. But if as part of the settlement, the money goes to your children or other dependents, you owe the tax.
401(k) Warning Signs
The vast majority of 401(k) plans operate fairly, efficiently and in a manner that satisfies everyone involved. But problems can arise. The Department of Labor lists signs that might alert you to potential problems with your plan:
- consistently late or irregular account statements;
- late or irregular investment of your contributions;
- inaccurate account balance;
- losses that can’t be explained by market performance;
- investments you didn’t authorize;
- late or irregular payment of benefits to former employees;
- contributions that do not appear on your account statement;
- unusual transactions that appear on your account statement;
- frequent and unexplained changes in plan providers; or
- recent financial difficulty for your employer.
What to Do When Problems Arise
If you believe there is a problem with your 401(k) plan, contact your plan administrator or employer first. They may immediately agree that you have a valid complaint or they may be able to clear up any misunderstanding. If you're not satisfied with their response, there are a number of places to turn for help. Several are listed on the next page.
Where to Look for Help
Employee Benefits Security Administration
The Labor Department’s Employee Benefits Security Administration (EBSA) is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan money, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law and workers’ benefit rights. You can call EBSA toll-free at 1-866-444-3272, or contact the regional EBSA office nearest you for help.
When you call EBSA to file a complaint, make sure you have the necessary documents, such as your summary plan description and recent plan statements, with you. The regional office will ask you a series of questions to help determine the nature of your complaint. If it’s warranted, EBSA will then contact your employer and launch an investigation into the administration of your plan. EBSA will not disclose your identity to your employer. However, if your employer discovers that you have filed a complaint, your job will not be affected. Anti-retaliation provisions protect you from mistreatment or discrimination and ensure that you can’t be fired.
If a problem involves a brokerage firm serving as the 401(k) fund administrator, or brokers who provided advice or handled transactions, you have the option of filing a complaint with FINRA.