Question: Your advice to the person with cancer was interesting. Can't this sort of cancer be considered a disability? Could the 401(k) money be taken by the participant and then given to the person's wife?

TB: You're correct that the employee could withdraw the money from the 401(k) and give it to his wife. I didn't suggest this alternative because I assumed the nursing home would also include the wife's assets. If this isn't correct, then your suggestion certainly is a better alternative.

Question: In a recent issue of Defined Contribution News, "orphan plans" are defined as "retirement savings plans that are abandoned by plan fiduciaries."

Why would a plan fiduciary abandon a defined contribution plan? Wouldn't there be less risk involved in just terminating a plan and distributing the funds to participants?

TB: Based upon my experience, plans are abandoned when the fiduciary either dies or disappears. An individual may be the sole trustee and sole business owner. Getting a new trustee appointed can be difficult when the existing one dies.

Disappearances are usually due to a business failure. The owner may suddenly leave the area in an attempt to avoid creditors and irate customers. In these instances, fiduciary liability is of less concern than basic survival and/or removing family members from the scene. The 401(k) assets are usually safely held at the investment company, which manages the plan, except for contributions that may have been deducted during the period prior to bankruptcy. It can take months to get the money out of the plan to participants in these situations, because it may be necessary for a court to appoint someone to wind up the affairs of the business, including the plan.

Question: If I decide to retire early, can I leave my defined contribution plan money with my former employer until I reach 59ý?

Also, if I have a balance of $600,000 when I reach 59ý, what's the best way of cashing it out? Should I take a one-shot or monthly distribution? What are the tax implications?

TB: Your employer can't force you to take the money out of the plan prior to the earliest retirement age that is defined in the plan, if you have a balance of $5,000 or more. Most plans use age 65, but some plans also contain an earlier retirement age that may be applicable. You should check the Summary Plan Description for your plan for the rule. If that isn't clear, then you should ask your employer or the organization that services the plan what the earliest age is that you must take the money after you retire from the company.

Taking a one-shot or lump-sum distribution, as it's commonly known, will generate a large tax bill even if you wait until after age 59ý. I suggest considering rolling the entire amount directly into an IRA. Then establish an automatic monthly withdrawal arrangement for the amount you need. You may withdraw whatever amount you wish each month prior to age 70ý. Withdrawals after age 70ý must be large enough to satisfy minimum distribution rules defined by the IRS.

You will retain the flexibility of increasing or decreasing your withdrawals according to your needs if you transfer the money into mutual funds via an IRA rollover. Only the amount you withdraw each year will be taxable. The amount remaining will continue to be tax-sheltered, which means you won't have to pay current tax on interest, dividends, capital gains, etc. This is a big advantage that will be lost if you take a taxable lump-sum distribution and invest what's left outside the plan or in an IRA.

Question: What is an "open architecture" plan, and what's the likelihood of this coming to pass? When do you see this happening? My partners and I are brokers and are very excited about this.

TB: It's my opinion that employers will cease to be investment gatekeepers by the end of this decade. In an "open architecture plan," participants of 401(k) plans will pick where their money is to be invested, similar to how it works with a SIMPLE-IRA.

An employee's contributions will be deposited directly into his or her 401(k) account, similar to the direct depositing of paychecks at the organization selected by the employee. This change won't require any change in the law. The market will move in this direction on its own.

Question: My 401(k)-rollover check has been lost. My former employer and current employer can't seem to trace it. This has been going on for months. What can I do to speed up this process? I have lost a year's worth of potential earnings on this amount.

TB: You should ask your former employer to issue a new check payable to your new employer's plan and send the check to you. You can then give the replacement check to your new employer to deposit into its plan. You may not be able to do anything about the lost interest because it is impossible to determine who is at fault for the lost check. It could be the U.S. Postal Service.

The procedure I am recommending will help you avoid getting into a similar situation again where you will have difficulty knowing where things went wrong. You should contact the Department of Labor at (800) 998-7542 if your former employer doesn't issue a new check promptly.

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.

Read Ted Benna's Biography

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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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