Ending the Lag on 401(k) Plans

As traditional private industry pension plans slowly fade away, self-directed employee retirement plans are burgeoning. As of last year, more than 268,000 such plans, known as 401(k), were in effect. Their nearly 20 million participants held assets worth $640 billion. Each month about $3 billion in fresh money flows into retirement accounts, much of it earmarked for investment in mutual funds. What the U.S. Labor Department has found, however, is that a lot of 401(k) money isn’t being invested by employers in a timely way, meaning some employees have been losing potential earnings. The department rightly wants that practice to stop.

Rules now require employers to put employee contributions into retirement plans as quickly as “reasonably possible,” but within no more than 90 days. Some employers, especially smaller companies, have taken that as permission to hold on to and use employee retirement contributions for up to three months. The department proposes requiring that employee contributions be placed in retirement accounts on the same schedule that governs deposits of Social Security and Medicare payroll taxes and withholding for federal and state income taxes. For larger employers, that could mean within a few days. For smaller employers, up to 45 days.

Trying to time the stock market--guessing when it might move up or down--is highly risky and seldom successful. That’s why many professionals advise those who invest to do so on a regular schedule. When the market goes up, the value of their earlier investments rises. When it goes down, the investor’s dollar buys more shares. For 401(k) participants who invest in the market, a steady and timely flow of their investment dollars is probably the best protection for their savings. In moving to tighten the deposit schedule, the Labor Department is on the right course.