401(k) Woes When a Company Goes Bankrupt — Fair Game

The following is an excerpt from an article in 

The New York Times
Sunday, August 26, 2012

401(k) Woes When a Company Goes Bankrupt — Fair Game

By GRETCHEN MORGENSON EVERYONE with a 401(k) knows that bad investments and high fees can threaten their retirement. But what if the company that sponsors your plan goes bankrupt?

As the employees of one small company have learned, it can wreak financial havoc. They’ve gone nearly four years without access to their retirement savings.

It isn’t supposed to be this way. When a company collapses, the assets of its 401(k) are to be transferred to account holders — promptly.

But that’s not what happened at Penn Specialty Chemicals in Memphis. In July 2008, the company sold most of its assets to a French chemicals concern. Its employees — there were fewer than 100 — were given the choice of shifting their retirement plans to the acquirer or keeping them with Vanguard, the fund giant that is the record keeper of Penn Specialty’s 401(k). Many people in the plan, especially those close to retirement, chose the path of least resistance: they stayed with Vanguard.

Then, that December, Penn Specialty filed for Chapter 7 bankruptcy — liquidation. The court appointed George L. Miller, a certified public accountant at Miller Coffey Tate in Philadelphia, as trustee. In these cases, the trustee must advise the Internal Revenue Service why the 401(k) was terminated and await I.R.S. approval that the plan had not run afoul of tax laws.

Such a determination should have been relatively simple in Penn Specialty’s case because, as the I.R.S. manual says, bankruptcy is usually sufficient evidence to support a plan’s termination. In such a circumstance, the I.R.S. says, participants should receive their share of the plan’s assets “as soon as administratively feasible,” or within one year.

The people with 401(k)’s at Penn Specialty haven’t even come close. Although they can switch among various Vanguard funds, they can’t touch their money. While they wait, they’ve had to pay high administrative fees on their accounts. Older account holders could become subject to substantial tax penalties because they can’t take distributions, as required by law. Inability to gain access to their funds has put some of the company’s retirees under significant financial strain.

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