No More 401(k) Funny Business : Federal rules are proposed to curb companies’ misuse of employee contributions

To their shock, several thousand workers who saved for retirement through 401(k) plans discovered that their bosses, despite being legally required to deposit the nest eggs in investment plans, had lost the money through unauthorized uses. This is old-fashioned fraud.

Fortunately the problem is not widespread. But to prevent further abuse, the Clinton administration last week proposed new safeguards to protect consumers. Under the new rules, which probably will take effect early next year, employers would be required to invest retirement funds in a much timelier fashion.

Since 1979, the government has allowed employees to make tax-free contributions to self-directed retirement accounts, named 401(k) after the measure that created them. Employers deduct the contributions from paychecks and are responsible for allocating the money to mutual funds or other savings plans. Current law requires these funds to be invested “as soon as practical” but sets a limit of 90 days.

This 90-day window has been abused. The problem has cropped up primarily in small and medium-sized companies; executives have taken advantage of the three-month grace period to use the employee contributions for their own purposes. Sometimes the money has been used to meet a payroll or for other business expenses. Sometimes it has been used for plain old personal spending. When the 90-day deadline arrived, some bosses didn’t have the money to deposit. Even when a boss had the money, the delay meant employees had lost out on investment gains that might occurred in the 90-day period.

Labor Department Secretary Robert B. Reich has proposed the new rules to set up strict time requirements for handling the contributions. Employers would have to turn over 401(k) funds under the same time requirements imposed on handling of employment taxes such as Social Security. That time varies depending on the size of the company, ranging from one day to somewhat less than a month for the vast majority of companies. The changes are subject to public comment for 45 days, and if there are no widespread objections they will take effect in three months.

A Labor Department study that led to the changes involved more than 300 companies, a fraction of the 401(k) plans in existence, about 250,000. About 18.5 million Americans now save through such plans, which total $525 billion. Some companies may balk at the new rules, but in this day of electronic transfers there is no reason to unnecessarily delay the transfer of retirement funds.