Question: I left my employer in July 2000 but the company refuses to release my 401(k) money until April 2001. Is this legal?

TB: The law gives employers the latitude to hold all contributions until participants reach retirement age. Some employers establish rules in their plans so that terminated employees must wait for several years before they will receive the money from the plan. Employers do this so that employees will not be tempted to leave just so they can withdraw the money from the retirement plan. A more common practice, however, is to pay out the benefits shortly after employees terminate, mostly because employers want to get rid of the fiduciary responsibility and the administrative costs.

The time period your former employer has given you is legal and proper if what it is doing is uniform for all employees and consistent with past practice. However, even if the manner in which they are treating you does not appear to be consistent with past practice, there still may be a reason for them to do this.

Here's an example: Participant accounts may be updated in your old plan using what is known as a balance-forward recordkeeping system rather than the daily valuation system, which is currently more common. If your employer uses the balance-forward system, employee accounts are probably updated at the end of each quarter.

Benefits are paid after the updating process is completed — usually four to six weeks after the end of the quarter. Benefit payments are usually based on the value as of the last valuation date. Because of the way the accounting in this system is done, when funds in the plan are increasing in value, this strategy benefits the remaining active plan participants. The reason is that your shares are valued as of the end of the quarter, but the payout to you is made later when the shares are higher. That appreciation is returned to the plan and ultimately benefits the remaining employees.

When the funds in the plan are declining in value (as is happening to many plans today), the reverse is true. If, at the valuation date, your fund shares were higher than at the payout date, the plan must absorb the loss. It's possible that your employer is holding the money until after the March 31 valuation date so that you will receive the lower value at that date. This, too, could be legal. It's not a sign of a vindictive employer but rather an employer trying to preserve as much benefit as possible for the remaining employees.

The delay may also be due to the fact that accounts under the plan are updated only once a year and the updating process will not be completed until April. This practice is common for plans that include a profit-sharing contribution. This contribution often isn't made until March in the following year.

Check the summary plan description, which you should have received when you joined the plan, to see what your employer is required to do.

The only time there is a legal requirement to pay a benefit within a certain time period is when an employee attains the normal retirement age or (if later) after 10 years of participation. Suppose you joined the plan at age 60 and the plan's stated normal retirement age was 65. Under this rule, your employer wouldn't be required to make a payout to you until you reached age 70.

Question: My company was sold in 1999 and I'm still waiting for my 401(k) assets to be transferred to my new employer's plan. The investments in my old 401(k) plan, including stocks in a self-directed brokerage account, will have to be liquidated and moved into my new employer's plan. While I've been waiting for this transfer, my account's value has fallen 46 percent.

Ideally, I would prefer to leave the assets in the old plan or roll them over into another qualified vehicle to maintain the brokerage activity until I can recover the losses. Based on the sales agreement between my old employer and my new one, I don't know if I have any chance to be granted an exception.

In August 2000, I was made aware of an IRS ruling that relaxes the "same desk" rule for 401(k) distributions following an acquisition of part of a company's assets. In my case, the sale was completed on Dec. 1, 1999, before the IRS ruling. Do I have any good arguments here? Do you have any suggestions as to how I can pursue avoiding this potential loss?

TB: The terms of the sales agreement will govern unless a change is made, which is highly unlikely because so much time and expense goes into completing such an agreement. Your new company could modify its plan to permit brokerage accounts at least for the employees who already have them. The sales agreement probably specifies that the assets of the plan will be transferred to the new owner's plan but I doubt that it specifies how the transfer will be made. From what you have indicated, the transfer will be accomplished by forcing participants to sell the investments they have and to re-invest the money into the applicable investments of the new plan. The transfer could be accomplished by making an "in-kind" transfer so that you can maintain the existing investments. I have been involved in some similar transactions where we handled the transfer like this.

One conclusion I have reached recently is that the practice of forcing employees to sell their investments and move the money into another set of investments may be a violation of Employee Retirement Income Security Act (ERISA) fiduciary standards. ERISA requires employers to make investment decisions based on the sole best interest of participants.

The asset sale that you will be forced to make is for administrative simplicity rather than what is in the best interest of participants. You should ask your new employer to permit an in-kind transfer so you can retain the existing investments. There will be added administrative expenses, however, which you will probably have to pay. You may also ask your new employer to re-examine the possibility of permitting distributions as a result of the change to the same desk rule.

If all else fails and you are forced to move the money, you may want to look for a fund in the new plan that is closest to the investments you have. For example, if the stock is a technology company, investing in a fund that is technology-oriented will give you an opportunity to recover when this group rebounds.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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