I regularly counsel clients on what they should do with 401ks from old employers, and have written blogs in the past giving multiple reasons why you may not want to leave your 401k money behind. I addressed topics such as potentially high fees, small amount of investment options, and no control over the company choosing new investment options. I did not, however, discuss closure or bankruptcy of the employer.
I currently have a client in this situation, and as I make call after call to custodians, third party associates, and lawyers on his behalf, I am reminded that much of the trouble that my client is going through could likely have been avoided if he had transferred his assets as soon as he left his job.
Once an employer files for bankruptcy or goes out of business, it becomes very difficult for the former employees to retrieve their funds, and often involves considerable expense.
Let me say up front that as long as the funds have been deposited with a custodian, the employee is vested, and there are statements proving the balance of the accounts, then the money still belongs to the employee. It just may take a lot of extra leg work to retrieve it.
The typical procedure for moving money from an old 401k to either a new one or a self-directed IRA is usually rather painless. Investors need to establish the new account, fill out the roll-over paperwork from their old company, and have a trustee from the previous employer sign off indicating that the individual is no longer employed at the company.
The tricky part is accomplishing these steps when the company no longer exists. It may be difficult or near impossible to find anyone from your previous employer to sign off on the necessary documents. The custodian (place where your 401k is invested) of the funds typically will not make an exception on this to allow you access to the funds. So while your money is still there, it can’t be moved.
What should you do if you find yourself stuck in this situation?
You will probably need to find a lawyer who handles bankruptcies or securities law (a rather costly step that may be avoided under normal circumstances). It might help if you can find other previous employees in the same boat, so that you can join together to share in the costs of the proceedings.
As I said, this likely can be avoided if you immediately rollover your old 401k over upon leaving a job. It could save you months of headaches, and a few legal bills to boot. As always, consult with a qualified financial professional to help make this transition as painless as possible.
Joe Wirbick is the President of the Lancaster, PA financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.