THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, December 4, 1995 TAG: 9511300016
SECTION: FRONT PAGE: A6 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 62 lines
Labor Secretary Robert Reich has sounded a wake-up call for investors who have been lulled into a false sense of security by 401(k) retirement plans.
More and more employees save for retirement through 401(k)s. Pre-tax dollars are automatically deducted from pay and grow into a retirement nest egg. Its one of the best deals around, and few employees can afford to pass up the chance to participate.
But the explosive growth of 401(k) plans - from $92 billion in assets in 1984 to $650 billion today - has been accompanied by an increase in chicanery. When huge sums of money are at stake, the unscrupulous are never far behind.
More than 300 companies are being investigated for allegedly mishandling 401(k) money. ``We have reason to believe these companies are simply taking contributions from employees and using the money for their own purposes,'' Reich says.
Such actions are illegal. When caught, 100 of the suspect companies made restitution of more than $2.6 million in contributions that were never deposited in employee accounts. Other firms will be prosecuted. Unfortunately, the Labor Department lacks enough manpower to police the 140,000 401(k) plans that now exist. Manpower could become an even bigger problem if a Congress bent on downsizing government squeezes the department further.
A common problem with traditional pension plans was underfunding by companies, especially when they got in financial trouble. Diverting 401(k) funds is just the latest version of the same dodge. For companies, it's like getting an interest-free loan.
In addition to actual misuse of funds, there's also a problem with companies making miscalculations in several formulas that govern 401(k) investments. Though not necessarily intentional, such slips can shortchange investors. According to a retirement-benefits expert quoted in The Wall Street Journal, 30 percent of plans may experience such bookkeeping errors.
What's an investor to do? Keep investing, but keep alert. The money in a 401(k) is yours, not the company's. It's your responsibility to protect it as you would your purse or wallet.
The Labor Department advises investors to compare pay-stub deductions with 401(k) deposits. They should match. Employee contributions must be invested within 90 days. Employers have a year to deposit matching funds.
Investors should read plan documents, know what they're buying and be aware of eligibility and vesting rules. Plan administrators ought to be able to answer any questions.
Finally, the Labor Department advises investors to watch for warning signs: drops in account balance that can't be explained by market fluctuations, investments appearing on a statement that weren't authorized, unusual transactions such as loans to the company, frequent changes in investment management and an employer in financial trouble.
The vast majority of 401(k) plans are professionally run by reputable firms. The Labor Department is investigating only 0.2 of a percent of plans. But today, employees have greater responsibility for their own financial future. They need to exercise caution and diligence. by CNB