Are your 401K funds safe? - 3-Oct-2008 - Generational Dynamics

Generational Dynamics Web Log for 3-Oct-2008

Are your 401K funds safe?

I received the following question from a web site reader. I've carefully edited the text to hide identities, and protect the guilty:

"Not trying to create a panic, but just don't like being held hostage by dumb rules that could effect your nest egg.

If you are in the [company 401K plan], you can not remain an employee and move your account balance to a roll-over IRA plan outside the [company-sponsored plan]. If you currently believe your retirement funds should now be protected in a money market fund and not in a stock or bond fund during these times of financial market stress, you have only one choice under the company plan, one specific money market fund.

The problem here is the fund's makeup is only 12% of Government backed treasuries. The other 88% of the holdings are potentially high risk instruments if the financial market turns ugly. They have a security blanket to back up the fund but it is not backed up by the US Government. I spoke to a rep at [the investment firm managing the fund] and he confirmed the fund holds NO guarantee that your money will be safe from loss and could face a situation where it can not maintain the $1.00 par value. The only way an employee can roll their nest egg out to a safer plan is to leave the company by separation (voluntarily or involuntarily) or retirement."

I wrote back to him: You're going to be screwed. I strongly urge you to find a loophole. Perhaps claim a medical emergency in your family and withdraw the funds and take the tax penalty.

There are two things in your message that really raise red flags:

You can't shift to another money market fund, one that's 100% backed by Treasuries. This should be easy as pie.

They won't tell you what securities the fund has invested in. Of course this shouldn't be a problem.

Based on these two major red flags, I believe that your funds are already frozen, meaning that even if you separated from the company, they would make it difficult or impossible to withdraw or transfer your funds.

Read the following articles from earlier this year for examples of this practice: "Wealthy investors in auction rate securities can't get their money out"; "Your money market funds may be frozen without you knowing it"; and "Investment bank UBS is now 'writing down' clients' auction rate securities."

If you have a lot of money in your retirement fund, all I can suggest again is that you try to find a loophole.

If my suspicion is true, then both the investment bank and the company are scared to death of panic withdrawals. If employees discovered that their 401K savings are nearly worthless, there would be a riot.

For that reason, you have some leverage. Get together with a couple of other people, hire a lawyer, and make some demands, with the threat of spreading the word that the money market funds are frozen.

Whatever you decide to do, you have little time. (3-Oct-2008) Permanent Link
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Generational Dynamics Web Log for 3-Oct-2008 Are your 401K funds safe?

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Generational Dynamics Web Log for 3-Oct-2008
Are your 401K funds safe?