U.S. Expects 1,700 Firms to Use Grace Period to Return Funds to 401(k) Plans

The Labor Department expects more than 1,700 companies to use a six-month amnesty period to repay millions of dollars improperly withheld from their workers’ 401(k) pension plans, officials said Wednesday.

However, some business groups said the program could lead to mistrust among workers about the popular savings plans.

About 1% of all companies with the contributory pension programs are likely to take advantage of the grace period, the Labor Department said as it unveiled details of the program that starts today and runs through Sept. 7.

For delinquent employers, the government is offering a chance to “pay up painlessly,” Labor Secretary Robert Reich told a news conference.

Prompted by worker complaints, last year the Labor Department began widespread investigations of companies mishandling 401(k) funds, which must be deposited in the investment accounts within 90 days of being deducted from paychecks. With assets of $522 billion, the 401(k) accounts are becoming the major source of pension savings for many American workers.

Reich disclosed that his department has examined more than 600 employers and recovered $6.1 million--$5 million in workers’ contributions and $1.1 million of employers’ stock never deposited in the 401(k) plans. The investigations also led to 35 criminal cases, which have thus far resulted in four guilty pleas.

The amnesty program requires that the money be restored, along with interest. This means workers who had selected stocks or mutual funds for their 401(k) programs would receive any gains that accompanied the sharp rise in the stock market last year.

Employers must repay whichever is larger: the profits that would have been accrued by the worker’s 401(k) investment, or the interest rate charged by the IRS for late payment of taxes. The current IRS penalty rate is 9%.

The voluntary amnesty is expected to produce many more millions of dollars in recoveries. However, the government does not have precise estimates because regulation has been skimpy in the huge 401(k) industry.

About 22 million workers are covered by 401(k) plans. The plans permit money to be deducted from workers’ paychecks, before taxes, and invested, with no taxes on the profits, until the money is withdrawn at age 59 1/2 or later. Employers match a portion of the workers’ contributions.

The Labor Department staff estimates that about 1,772 plan sponsors, or 1% of the 172,246 programs permitting worker contributions, will participate in the amnesty, officially called the Pension Payback Program.

However, some business groups reacted with skepticism on Wednesday. The highly publicized amnesty program will “create a lot of mistrust” among workers, said Lynn Dudley, vice president of the Assn. of Private Pension and Welfare Plans, which represents major corporations. Most plan sponsors are careful and conscientious about proper management of the 401(k) plans she said. But the publicity about a small number of violators creates fear, she said.

“People are scared and say, ‘I won’t give them my money,’ ” Dudley said. The amnesty “is something the Labor Department could have done informally, without a lot of fanfare,” she said. “Now they have gone out and scared a lot of people. I think it stinks when they go out and stir up a whole lot of debate and concern in the media.”

Reich said the department will decide within a few months on a new rule for employer deposits of 401(k) money to replace the current 90-day standard. Officials had been considering a requirement for deposits into investment accounts within two or three days after the money is withheld from paychecks. However, many employers and business groups have protested, complaining that they cannot meet that standard.

Information on the amnesty program is available at (202) 219-4377. It is being handled by the Pension Payback Program, U.S. Department of Labor, Pension and Welfare Benefits Administration, P.O. Box 77235, Washington, DC 20013-7235.