When a company goes bankrupt, the 401(k) plan is considered “orphaned.” The money in the orphaned plan is still owned by you. If managed properly by a third-party, the 401(k) plan is not a company asset, therefore, creditors cannot lay claim to it. Funds in an orphaned 401(k) are usually not accessible until a new plan sponsor and fiduciary (or overseer of the plan) are put in place. The ailing company may establish a new sponsor and fiduciary or they may cancel the retirement plan entirely. Either outcome can take a long time.
If your retirement plan is cancelled, you may receive a lump sum that can be rolled over into another retirement account or taken as cash, minus early withdrawal penalties. Check with your bankrupt company to see how they will handle your 401(k).
The Employee Retirement Income Security Act of 1974 (ERISA) establishes the minimum standards for 401(k) plans in the United States. The U.S. Department of Labor (DOL) helps to enforce ERISA and protects orphaned funds. In extreme cases, the DOL will hire an independent fiduciary to manage an abandoned 401(k). Contact the DOL’s Employee Benefits Security Administration at 202-219-8776 or toll free at 866-275-7922.
After a bankruptcy announcement, the investments in your 401(k) plan may decrease in value, especially if you hold company stock; you may have less owed to you than you expect. Many organizations promote company stock to their employees. Having too much company stock in your 401(k) can be devastating to your retirement should the company go bankrupt. Enron employees lost major value in their 401(k) plans by holding high percentages of Enron stock when the company failed. Diversification helps to offset losses with gains from other securities.
If you leave your employer, it can be helpful to roll your 401(k) over to an individual retirement account (IRA). This will help protect your retirement funds should your company go bankrupt after your departure. For more information, see this Fox Business Article:
www.foxbusiness.com/story/markets/market-overview/k-safe-bankruptcy/
