Rule Change Will Speed Employer Deposit Of 401(K) Funds Workers Stand To Gain $76 Million In Savings

Each year, tens of thousands of American workers have billions of dollars withheld from their paychecks to be invested in retirement plans run by their employers. They assume the money goes where it is supposed to and gets there promptly.

In the vast majority of cases, that assumption is correct.

But last year, the Labor Department announced that it had discovered a small number of plans in which contributions were not being made in a timely fashion, or not being made at all. Some of the violations were merely technical, but in others, contributions were being delayed so the company would have the use of the money, and “in some cases, it was simply stolen,” Labor Secretary Robert B. Reich said this week.

As a result of the probe, the department has rewritten rules governing these types of tax-deferred savings plans - mainly 401(k)s, but also including others covered by the 1974 Employee Retirement Income Security Act.

Under the new rules, employers will be required to transmit employee contributions to such plans no more than 15 days after the end of the month in which the contributions were withheld.

Current rules require such transfers as soon as is reasonably possible, but give companies up to 90 days. The department found some employers were interpreting the rule as simply giving them 90 days to hold the money - allowing the company, rather than the workers, to earn the interest or investment returns for those three months.

Some companies were treating the worker contributions as “an interest-free revolving loan fund,” Reich said.

The speedup of contributions will increase workers’ retirement savings by roughly $76 million a year, based on typical rates of return, the department figured.

Employer groups have not been happy with the department’s actions, arguing that problems are not widespread, and that serious ones already are illegal.

The final version is workable, but “it’s going to be an additional expense” that isn’t necessary, said Mark J. Ugoretz, president of the ERISA Industry Committee, a trade group.

“Employers try to maintain an orderly process,” he said. “Money comes in, they put it in the plan at the end of the month. This effectively disrupts the process.”

The savings from the speedup work out to about $9 a worker per year, he said. “You can’t go to McDonald’s with your kid for 9 bucks.”

“What a lot of people in the business community find disheartening” is the department’s suggestion that “they did this because there is wholesale corruption” in the system, Ugoretz added.

“That’s not the case. We have a hard enough time getting people to save money in (these) plans, and for the department to carry on in this manner is damaging to the system,” he said.

Reich emphasized that “the pension system we have in this country is sound,” and that workers should not take the department’s action as a reason not to participate in a company plan.

Despite this week’s action, pension experts advise workers to keep an eye on their plans themselves, making sure they get regular statements and other indications that things are in order.