401(k) Rule Changes Aim To Protect Worker

By Richard M. Barron, Staff Writer, News & Record - March 26, 2005

Scott Aicheson didn't think too much about investing when he was younger. So when he left a job, he just took the cash from his 401(k) retirement account and spent it.

"I had a couple thousand dollars in it. And when I left the company, you get hit with ... tax on it, and I ended up with maybe around $1,300 dollars," Aicheson said. "I used it for probably God knows what and it's gone and that's the end of it."

That won't be as easy for small investors in 401(k) accounts to do starting Monday. A new federal law takes effect that attempts to protect young investors from themselves.

The new rule covers what happens when you leave a company. When you've accumulated between $1,000 and $5,000 in a 401(k), your employer must roll that money over into an IRA that you can take with you, if you leave without giving any instructions about the investment. The old rule says the opposite, that a company must give you the cash if you leave without instructions.

Old or new rule, companies are still required to tell workers who leave what their options are with 401(k)s, which include just leaving your money in your company's plan. But many just forget to do anything about it.

Aicheson, 32, of Burlington, thinks the new rule is a great idea. "I could see how someone might say, 'It's my money and (the law is) an infringement.' But in the long run it's really there to help you -- you just have to have a little bit of vision," he said. "If you're hung up on 'This is my money and I need it right now,' you shouldn't be involved in a 401(k) anyway."

Aicheson, who is field service manager at Dougherty Equipment in Greensboro, now follows the example of his wife, Marion, 29. She left her earlier job around the same time he did. "My wife immediately rolled hers over, and hers has multiplied," Aicheson said.

Still, the rule will be good for his younger friends. "I've spoken with people who don't seem the least bit interested. They are more recent college grads, and they have bills to pay," Aicheson said.

Terri Vaughan, a vice president of benefits consultant Aon Consulting in Winston-Salem, said that the old rule was partly designed to help companies rid themselves of small accounts that would force them to keep sending statements to past employees. Now, although it takes a little more effort, companies see the benefit of helping their workers get a better footing with their investments.

"We think that more employees will make a conscious choice," Vaughan said. "In the event an employee does not make a conscious choice it will roll over. Regretfully, we all have a tendency to let deadlines slip and once the check is in hand, it's easy to spend it instead of carrying it down to your preferred rollover vendor."

Most companies are taking the rule change in stride, she said.

Her company is helping employers to make sure they're set up with the right IRA vendor. Even that is trickier than it looks. Employers need to be sure the company that's good at managing the large pool of 401(k) money for their employees is also good at handling small IRA accounts. They are not always the same, although most employers find they can go to the same vendor for both services.

Of course, the new rule ultimately puts the average worker in charge of that IRA. And that can be daunting for some.

Aicheson is paying close attention to his IRA statements now, and he has changed the investments in his account to get a better return. "When it's growing so much, you think, 'How much is it going to be in 20 or 30 years when I need it?' "

The fact that an IRA is protected from taxes helps. "Anything that's tax free is good," he said.

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