Here’s how to protect your 401(k) assets from a company bankruptcy. | ET REALITY


After several interest rate hikes by the Federal Reserve, many have prepared for stock market volatility in their 401(k) plans. But experts say some plans could face another risk: employer bankruptcy.

Generally, your 401(k) is safe from creditors in bankruptcy, as protected by the Employee Retirement Income Security Act, or ERISA.

“A 401(k) plan is truly one of the safest vehicles in which to save money thanks to ERISA protection against bankruptcies and creditors,” said certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts. . But some investors may feel “too safe” and it’s important to know the risks, he said.

More from Life Changes:

Here’s a look at other stories that offer a financial angle on important life milestones.

Single Stock Risk Can Be ‘Incredibly Dangerous’

When an employer files for bankruptcy, large concentrations of that company’s stock in a 401(k) can be “incredibly dangerous,” according to Galli.

“Clients often have 40%, 50%, 60% or even 100% of their account invested in company stock,” he said, noting that aggressive investors should not allocate more than 20% to company stock. company and conservative investors should stay below 10%.

“There’s a good chance the stock will fall deeply,” said CFP Ashton Lawrence, principal at Mariner Wealth Advisors in Greenville, South Carolina. “That’s why most advisors are in favor of diversification.”

The Risks of Guaranteed Interest Accounts

Fed will skip rate hikes in September and November, says Santander's Stephen Stanley

Galli said there is also a hidden risk with “guaranteed interest accounts,” a common 401(k) asset that provides interest for a set period of time. While it is an attractive option for conservative investors, the value of the underlying assets may decline in value.

Typically, these contracts are backed by insurance companies that invest in bonds, the value of which typically falls as market interest rates rise. To liquidate the entire account, the bonds could be sold at a loss, Galli said. “And that loss is always passed on to the account holder.”

When a 401(k) plan closes, employees may see “adjustments” to their guaranteed interest accounts, reducing the value of the assets.

Consider rolling over old 401(k) accounts

Leave a Comment