What do your 401(k) contributions do in that time between leaving your paycheck and appearing in your retirement savings plan? If they take a while to get there, you may suspect that money took a little vacation to the Bahamas while you were busy toiling away at work. Or, you may suspect something much worse.
Here's the question posed by one Foolish reader:
"How quickly should my contributions from my pay be credited to my 401(k) account? I get paid every 15 days. It is deposited in the bank electronically five working days after the end of the pay period. The 401(k) contribution takes between 30 and 60 days to be deposited into my 401(k) account. It seems to me this contribution is part of my salary and should be deposited just as quickly as the "take home" pay. Can you tell is this lawful, for my employer to earn the interest on my contribution for this delay time?"
According to the Labor Department and its guide for employers, called "Meeting Your Fiduciary Responsibilities," employers must deposit your 401(k) salary deferrals in a timely manner.
More specifically, the law requires that the employer deposit the contributions as soon as they can reasonably segregate the money from the company's assets, but no later than the 15th business day of the month following the deferral from your paycheck.
To make that more clear, consider this example. Let's assume you get paid on the 1st and the 15th of each month. If you elected to defer some of the salary paid to you on Feb. 1 and have it deposited into your 401(k), the money should appear in your retirement account no later than the 15th business day of March, or March 21. The same holds true of any 401(k) contributions that you might have had withheld from your Feb. 15 paycheck.
That means it could take roughly seven weeks for any money withheld at the very beginning of a month to finally be deposited into your 401(k) account. Remember, that's the outer reaches of what the law allows, and your company should be depositing the money as soon as it's feasible.
Late deposits obviously can be a losing proposition for employees. The less time your money spends in your 401(k) account, the less opportunity you have to make the most of investing your hard-earned dollars for retirement. When the money spends as much time as possible in your account, you maximize the size of your retirement nest egg.
Excessive delays in the time it takes for your retirement savings deferrals to leave your paycheck and get deposited with your 401(k) plan may also be a warning sign that there's something fishy going on with your plan.
Laws governing the deposits and administration of 401(k) plans fall under the Labor Department's Employee Benefits Security Administration, which has been pursuing an enforcement project to make sure workers' 401(k) deposits do not run into excessive delays (or, in some cases, fail to be deposited at all). They have found this can crop up most often when an employer has been having fiscal problems and turns to your retirement contributions to fix its cash woes.
The IRS has also identified this problem as one of the biggest uncovered in its examinations of 401(k) plans. The IRS says that, in most cases, the money you've deferred to your 401(k) account can be separated from the company's other assets within a day or two after your paycheck is issued. In many cases, the money can be segregated on the same day.
The IRS also says many companies have misinterpreted the rule that requires the deposits be made no later than the 15th business day of the following month. That's not permission to wait that long in every case, the IRS says. In other words, your employer may not have a good reason for holding back your contributions until the very last moment.
If you think you have a complaint to make, you can contact the Employee Benefits Security Administration office nearest you. You can also get more general information from its publications and reports.
For more 401(k) Foolishness, browse through our 401(k) Center, or check out any of these articles:
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Fool contributor Mary Dalrymple welcomes your feedback. The Motley Fool has a timely disclosure policy.