When a coworker removed money from the 401k in the middle of the year, the rest of the employees were financially impacted

Recent events at an Ohio manufacturing company have brought to light a critical issue affecting retirement savings across America. A situation where a former owner’s mid-year withdrawal from a pooled 401(k) profit sharing plan resulted in substantial losses for remaining participants has raised concerns about retirement plan structures and participant protections. With some employees reporting losses exceeding $50,000, and others facing thousands in unexpected deductions, this case highlights the complexities of pooled retirement plans and the importance of understanding plan administration.

A comparison of Pooled 401(k) Plans vs. Individual Accounts

The landscape of 401(k) plans has evolved significantly over the years. While most modern plans maintain separate accounts for each participant, some older or smaller plans continue to operate under a “pooled” structure. In these pooled arrangements, all participants’ funds are combined and invested together, creating a shared investment pool. David Levine, principal at Groom Law Group specializing in employee benefits, emphasizes that pooled plans can create unexpected complications during large withdrawals, particularly when market volatility is high. The timing of valuations becomes especially crucial in these situations, as it directly affects all participants’ account values.

The Impact of Mid-Year Withdrawals

The withdrawal of substantial funds from a pooled plan between regular valuation dates creates a complex ripple effect throughout the entire plan. Market timing disparities can emerge when withdrawals are processed at book value rather than market value, potentially leaving remaining participants to bear disproportionate investment losses. 

Without implementing a special valuation date, withdrawals might be processed using outdated values, further complicating the fair distribution of assets. The most significant impact often falls on remaining participants, who may find themselves shouldering losses proportional to their account balances, regardless of their investment choices or risk tolerance.

Legal Requirements and Protections

The Employee Retirement Income Security Act (ERISA) provides a robust framework for 401(k) plan administration. Plan fiduciaries must prioritize the interests of all participants, maintaining careful oversight of plan operations and ensuring fair treatment across the board. 

According to Jason Roberts, CEO of the Pension Resource Institute, emphasizes that plan administrators carry a significant fiduciary responsibility to protect all participants from unfair impacts during large withdrawals. This often necessitates implementing special valuation dates and carefully timing transactions to maintain equity among participants.

Steps to Take If You’re Affected

Participants who find themselves affected by similar situations should take immediate action to protect their interests. The first crucial step involves gathering comprehensive documentation, including plan documents, valuation procedures, and account statements that detail the losses. Understanding your rights begins with a thorough review of the Summary Plan Description, which outlines the plan’s operational procedures and participant protections. Professional guidance becomes invaluable in these situations. Consulting with an ERISA attorney, reaching out to the Department of Labor’s Employee Benefits Security Administration, or engaging a forensic accountant can provide crucial insights and direction for addressing the situation.

Prevention and Best Practices

Effective plan administration requires robust procedures and clear communication. Regular valuation procedures should be established and followed consistently, with special attention paid to large withdrawal requests. Plan administrators should consider modernizing pooled plans to individual account structures, which provide greater transparency and control for participants. Clear, ongoing communication with all participants helps maintain trust and ensures everyone understands their rights and responsibilities within the plan.

When to Take Legal Action

Margaret Johnson, an ERISA litigation specialist, notes that participants who experience significant losses due to improper plan administration may have grounds for legal action. The key lies in documenting the process and demonstrating procedural failures. 

Legal remedies might be appropriate when proper valuation procedures weren’t followed, fiduciary duties were breached, or required disclosures weren’t provided as mandated by law. Documentation of losses and administrative decisions becomes crucial evidence in these cases.

Looking Forward: Industry Trends

The retirement planning industry continues to evolve toward more transparent and individually controlled structures. According to a 2023 Vanguard report, the percentage of 401(k) plans using pooled arrangements has decreased significantly, now representing less than 5% of all plans, compared to 15% a decade ago. This shift reflects growing awareness of the potential complications associated with pooled structures and the benefits of individual account management.

Bottom Line

Participation in any retirement plan requires vigilance and understanding of the plan’s structure and operations. For those in pooled arrangements, staying informed about valuation procedures and monitoring account activity becomes especially critical. Understanding your rights under ERISA provides essential protection against potential administrative oversights or errors. The Department of Labor’s Employee Benefits Security Administration serves as a valuable resource for participants seeking information or needing to file a complaint, accessible through their website at www.dol.gov/agencies/ebsa or by phone at 1-866-444-3272.

This type of situation underscores the importance of regular plan review and updates to ensure all participants’ interests are protected. As retirement plans continue to evolve, staying informed about your plan’s structure and administration becomes increasingly important for protecting your financial future.