Retiree Portfolio Timely 401(k) Deposits

The sooner 401(k) contributions reach your account, the more you're likely to amass for retirement. Thus, it's in your best interest to know how long it takes for our contributions to reach your account, what the law requires, and what action to take if your employer fails to meet those legal requirements.

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By David Braze (TMF Pixy)
July 23, 2001

Recently, a Fool on the Retirement Investing board expressed concern about the time it took for the money deducted from his paycheck to be deposited in his 401(k) account. According to his post, he had just received his plan's second quarterly statement for this year. He noted that none of his payroll contributions were posted for those three months. On investigation, he learned that the funds were not received from his employer until after the quarter had ended. Obviously, this fact bothered him, and he wondered to whom he could turn for legal help because the timeliness of such deposits have "always been an issue" with his plan.

This is a concern that should be of interest to anyone who participates in a payroll deduction plan. That's because the sooner those contributions reach a participant's account, the sooner that money begins to earn a return. Obviously, the sooner those contributions earn a return, the greater the final sum that participant will likely have at retirement.

The Department of Labor (DOL), through the Pension and Welfare Benefits Administration (PWBA), protects the integrity of pensions, health plans, and other employee benefits. Included within that mandate is oversight of 401(k) plan administration. Currently, DOL regulations require that sums withheld from an employee's paycheck for the purpose of making a contribution to a 401(k) plan must be deposited in the participant's account "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets." That date may not be later than the 15th business day of the month following the month in which the payroll deduction occurred.

To clarify what that gobbledygook means, consider a plan participant who was paid on every Friday during the month of June 2001. That person had five paydays, meaning a 401(k) contribution was deducted five times in that month, the last on June 29. Legally, the employer has until the 15th business day of July -- or until Friday, July 20 -- to get those payroll deductions into the participant's 401(k) account. In theory, then, the payroll deduction that occurred on June 1, 2001, doesn't have to reach the participant's account until seven weeks have passed, or 49 days after the money was first taken from the employee's paycheck.

Note, however, that this deadline is an extreme. It is not intended to be the rule. In reality, the DOL says the money must be transferred to the plan trustee as soon as it's administratively feasible. In fact, if that doesn't happen, then a DOL audit of the plan could result in a heavy fine to the employer. That fine may be quite expensive, too. For an example of how seriously the DOL takes this issue, just review the PWBA press release that covers one such settlement.

Also note that this deposit deadline only pertains to the employee's contribution. It has nothing to do with the deadline for the deposit of any matching contribution made by the employer. Legally, employer contributions may be deposited to a participant's account as late as the employer's due date (including extensions) for that year's income tax return.

Let's say the participant's contribution finally makes it to his account. Will the money be invested within a day or so?

In most plans, that's precisely what happens since daily valuation of plan assets is relatively common. Unfortunately, though, that isn't always the case, particularly among smaller employer plans. Sometimes, due to the way the plan valuates its assets, it takes substantially longer for your contributions to be invested the way you wish. Indeed, it could take a month or even more for that to happen. In those cases, the trustee waits until a specific time to invest your cash, such as the end of the month or the quarter. In the interim, your contributions are held in a money market account, along with those of other participants, until the next plan investment date occurs. Thus, your employer may have made a timely deposit, but due to other perfectly legal administrative procedures, the cash still isn't invested in the way you want for a significant period of time.

Now that you know the rules, what should you do if you think it's taking too long for your employer to deposit your contributions into the plan? For one thing, if this is a chronic problem, you should recognize it as one of the classic signs of an employer who is encountering financial problems. The PWBA actually lists late deposits as one of the 10 warning signs of 401(k) fraud.

If your contributions are consistently deposited to the plan late (or if you experience other problems as outlined in the PWBA list referenced above), you should take immediate action to protect your interests. Start by writing a polite letter to your employer that outlines the problem(s) you have encountered. Request a written response from your employer to explain why these problems are occurring and what corrective action the employer will take to ensure their immediate resolution. Then send the letter by certified mail to ensure you have a record that you filed the complaint.

If after 30 days your employer fails to provide you an acceptable response, then write another letter of complaint. Address this one to your local PWBA regional office. Once again, outline the problem, and include copies of all correspondence between you and your employer. This office has the power to investigate complaints of any alleged plan violations by your employer. Request they do so. If an investigation reveals a problem with your plan, then the PWBA can take corrective action to ensure plan trustees are compelled to restore any missing plan assets. While such action may take more time then you desire, at least you will know you have done all you can to protect your retirement assets.

See you next week. In the interim and as usual, post your comments on the Retirement Investing or the Retired Fools boards.

Best to all... Pixy

Dave Braze abhors investing, and wonders why so many people waste so much time expounding on the topic. Still, he recognizes that others may feel differently about the topic, and that's why The Motley Fool is all about investors writing for investors.