When 401(k) Contributions Take a Detour, Employees Pay the Toll
Brian Mulholland and Charlie Mettam play poker for a living, so keeping an eye on their money is second nature.
But the two gamblers say even they can’t figure out what happens to their 401(k) contributions after the money is deducted from their paychecks.
Their employer, Hawaiian Gardens Casino, routinely takes nearly two weeks to deposit the contributions in their 401(k) accounts, the men say. Sometimes it takes even longer. Once last year, Mulholland said, it took 26 days for the money to show up in his retirement account.
Delays in depositing 401(k) contributions deny workers the chance to earn investment returns on the money. Moreover, employers that fail to make contributions in a timely manner could be in violation of the Employee Retirement Income Security Act, or ERISA, which specifies that 401(k) contributions be made “as quickly as the employer is able.”
In most cases, the deposit should be made the same day paychecks are issued, according to guidelines published by the Internal Revenue Service.
But as Mulholland and Mettam found, the law is one thing, but it’s another thing to get some employers to follow it and to get authorities to enforce it.
The Labor Department enforces ERISA laws, and Mettam said he called the department twice last year to complain about delays in getting his 401(k) contribution credited to his account. No one called him back, he said.
“There’s supposedly this agency out there that will help you, but they don’t answer the phone,” Mettam said. “I got a message saying that they will definitely get back to me. But they never did.”
Gloria Della, a spokeswoman for the Labor Department, said there was no record of the complaint. She speculated that Mettam might have called the department’s main line. People with 401(k) issues, she said, should call the agency’s Employee Benefits Security Administration at (866) 444-3272.
Even if Mettam did call the wrong number, however, Della could not explain why his complaint was not forwarded to the proper department.
Mulholland said he had repeatedly complained to his employer to no avail.
“They give me this song and dance about how everything is OK -- it’s all on the up and up,” said Mulholland, who said he and Mettam were employed to play with other gamblers and “keep the games lively.”
Ron Sarabi, Hawaiian Gardens Casino’s general manager, and Jessica Gonzalez, the casino’s general counsel, did not return calls for comment. Owner Irving Moskowitz could not be reached for comment.
If the casino is failing to make deposits on time, it has plenty of company, said Charles C. Ledbetter, a 401(k) expert at consulting firm Mercer Human Resources.
Ledbetter estimates that 10% of the nation’s small and mid-size employers don’t know about the law or ignore it. Big employers usually deposit workers’ 401(k) contributions into their accounts within hours of sending out payroll, he said.
To employees, the delays can be costly. Mulholland, for example, contributes $7,280 annually to his 401(k) plan. If his employer routinely held on to each of his biweekly contributions for two weeks, he would lose $28 in portfolio gains after one year and $446 after 10 years, assuming a 10% annual return. If 100 employees are being shortchanged the same way, their collective losses would be $2,800 after one year and nearly $45,000 after 10 years.
“It’s not riches, but that’s not the point,” Mulholland said.
Francis Clisham, regional director of the Employee Benefits Security Administration in San Francisco, said the Labor Department was aggressive in enforcing the law, responding promptly to complaints and investigating and suing companies that were found in violation of the law.
But neither Clisham nor spokeswoman Della could cite any recent instances in which the agency took action against an employer for failing to make deposits in a timely manner.
The Labor Department levied $42.8 million in fines against nearly 1,300 employers last year for 401(k)-related violations, but most of those cases involved the more serious infraction of failing to deposit employees’ money at all, Della said. The agency, she said, does not keep statistics on companies cited for delays.
Employers that make late deposits generally are not subject to fines, but they may have to reimburse employees for the estimated investment losses caused by the delays, Della said. Under ERISA, it’s only when a plan is more than 180 days late that companies are subject to penalties.
That’s not much of a deterrent, says Chad Parks, chief executive of Online 401(k), a San Francisco-based plan provider.
“Those who would abuse the system would just look at that as a low-cost loan,” he said.
According to IRS guidelines, the deposit should generally be made on the pay date, but “in no event can the amount be deposited later than the 15th day of the following month.” This latter rule is not a “safe harbor,” the guidelines say, as employers are expected to make deposits as soon as they can.
The IRS also has the ability to levy fines -- and even void the tax-exempt status of plans that do not follow 401(k) rules. Over the last year, the IRS has audited about 9,000 employee benefit plans and has levied fines on fewer than 40 of them for delays, said Michael Julianelle, director of employee plan examinations at the IRS in Washington. The sanctions do not follow any particular guideline and are generally negotiated to ensure that they are not too onerous.
“We have to balance whether the company can pay the fine and remain a viable entity,” Julianelle explained. The agency’s goal is to ensure that there is a continuing plan for participants, so imposing heavy fines that would undermine the company’s viability would be counterproductive, he said.
Julianelle said he could not cite any instance in which a plan’s tax-exempt status was taken away as the result of late deposits alone. Most commonly, the agency simply tells an employer to stop dragging its feet. Only repeat violators would face harsher actions, he said.
Given the lack of tough penalties, employees may have to be pushy to get a response from the federal bureaucracy, retirement experts say.
Mary Browning, director of the Upper Midwest Pension Rights Project, advises employees to collect their pay stubs and make repeated phone calls to the Labor Department until they get a response.
Ledbetter also said persistence was key.
“They respond to the squeaky wheel,” he said. “If they have one complaint, it might get lost in the shuffle. But if they have several complaints from the same company, they are much more likely to look at it.”