401k Plans - What Are My Risks?

With all of the news about companies going out of business, and banks being taken over, how can I be sure my money is safe? What happens to my 401(k) if my company goes out of business?

These are all very good questions. It's always important to understand the risk of your investments, but we don't usually think about them until economic turmoil is upon us.

Bank Accounts: Bank and credit union accounts, including checking, savings, and certificates of deposit, are insured against loss by The Federal Deposit Insurance Corporation (FDIC). This government agency has insured $100,000 per account holder per bank since 1980. The recent “financial bailout” signed by President Bush, has temporarily increased the coverage amount to $250,000 to help reassure depositors that their assets are safe.

401k Accounts: If your employer goes out of business, your 401k and other retirement accounts are protected by the Pension Guarantee Corporation. Your retirement assets are separate from your employer’s assets – they belong to you. They do not guarantee you will make money in your investments, only that the assets cannot be seized or lost as a result of failure by a company. However, if your retirement account contains company stock that stock would likely be worthless as a result of the company’s closure.

Also, check with your Investment Advisor to keep tabs on the status of your accounts. Any reputable adviser will happily show you the statements for your investment accounts. Unlike Hedge Funds, 401k accounts (and 529 plans) are heavily regulated already, so you can generally feel pretty safe that the investments are secure. Of course, they can go down in value, but at least you know that there is regulation backing the assets.