Reich Calls for Rule Change to Safeguard 401(k) Savings : Pensions: The proposal would decrease tampering with contributions by requiring firms to remit them more quickly.

In a move that could drastically decrease opportunities to tamper with employee pension money, Labor Secretary Robert B. Reich on Monday proposed new rules requiring companies to remit employee contributions to 401(k) accounts far more quickly.

Under current law, companies must deposit worker contributions as soon as possible but no later than 90 days from the time they’re withheld from worker paychecks. Some companies have interpreted that to mean they have a 90-day window to remit funds to plan administrators, who invest the contributions. The delays can deny workers months of investment earnings, and allows companies to use the retirement savings as interest-free loans.

The rules proposed Monday would force companies to send 401(k) contributions nearly immediately--eliminating the “float” and allowing workers to better track their retirement accounts.

What will the new rules mean to you? Are they expected to go into effect in their current form? Some key questions answered.

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Question: What exactly do the new rules say?

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Answer: The rules proposed Monday say that 401(k) contributions must be remitted in the same way as employment taxes--the Social Security and Medicare system taxes. Those taxes are paid the day after they’re received at big companies. However, small companies are given extra time--up to 45 days--to pay.

Q: Why is this change necessary?

A: Over the last several months, the Labor Department has been investigating about 400 companies that have violated 401(k) rules by stealing employee funds--or simply hung on to them for excessive periods. That causes workers to lose millions of dollars in potential interest or investment returns while companies get the benefit of interest-free loans.

In addition, some of the companies that have engaged in this behavior are financially troubled and are unable to make contributions at the end of the 90-day period, raising the risk that workers will lose still more.

While experts say the majority of companies follow the letter and spirit of 401(k) rules, the few that violate them can undermine worker confidence in the plans at a time when they are of growing significance to retiree security, Reich said at a news conference Monday.

But any delay will affect employees, especially in a year such as this one, when the stock market rose by about 7% each quarter. In practical terms, a 90-day delay could cost a 401(k) participant 25% of his or her investment earnings on new contributions in a given year. Even companies that do their best to remit funds within a week or two can cause their employees to miss some returns.

Of course, in a bad stock market, the delay could also save employees from losses.

Q: How many companies hold on to worker contributions for the full 90 days now?

A: No one knows for sure, but industry experts believe it to be a very small percentage of the 240,000 companies that sponsor 401(k) plans nationwide. Labor officials also stress that companies that consistently hold on to worker contributions for the full 90 days without a compelling reason are already in violation of the law.

Current law specifically states that companies must transmit employee contributions “as soon as they can be reasonably segregated from the employers’ general assets,” which should take far less than 90 days, labor officials note. The 90-day threshold is simply the maximum time allowable.

Q: If companies do hold worker money for the full 90 days, are they required to pay interest on it?

A: No, says Olena Berg, assistant secretary of the pension and welfare benefit administration at the Labor Department. “That’s why we want to shorten the maximum amount of time they can hold on to the money,” she says.

Q: When would the new rules go into effect?

A: They’re being sent out for a 45-day public comment period. If the comments are all favorable, the change could go into effect as early as March. However, there are already indications that the rules will be fought; some say they are too restrictive and would cost a fortune to implement.

Q: What’s the argument against them?

A: The problem is that pension plan contributions are not as simple to pay as employment taxes, says David L. Wray, president of the Profit Sharing/401(k) Council of America in Chicago. Here’s why: Every month employers remit the same percentage of worker wages to the Social Security and Medicare systems. But workers are able to change the amount they contribute to their 401(k) plans at almost any time. Contributing is also voluntary, so some employees opt in or out during the middle of the plan year.

Finally, the plans are subject to strict IRS rules, which, if broken, can result in substantial penalties. The bottom line: Companies have to do a lot of double-checking before sending contributions to plan administrators, Wray says.

“It is logistically impossible for many companies to meet the time frame that the [Labor] secretary called for this morning,” Wray says. “It just can’t be done.”

Q: What’s the alternative?

A: Wray suggests that the Labor Department tighten the rules to allow no more than 60 days’ leeway from when the contributions are made to when they’re remitted. That would give even the smallest employer the ability to meet the deadline, he says, and it would still close the contribution “window” by about a third.