Don’t panic if you’re still making deposits in your 401(k) account but you’re seeing the numbers dwindling instead of growing. If you have to, just stop looking at it for awhile so that you’re not tempted to make any rash decisions out of panic. Remember, those downward spirals are usually followed by upward climbs, sometimes quite significant climbs, so be patient. If your employer continues to offer matching funds, even in a bad economy, you don’t want to lose that extra money by putting a stop to your own deposits.

How to protect your 401(k) when the company you work for is in trouble

To protect yourself and your hard-earned money, you do need to pay attention to what’s going on around you and stay tuned in to clues about the financial situation of the company you work for. Be alert to layoffs and other cutbacks that indicate the company is in difficulty. If things seem to be going sour, don’t hesitate to ask your employer questions about your 401(k) plan. A lot of companies tighten their belts as part of making wise decisions during difficult economic times and have every intention of honoring your retirement funds so don’t panic at the first sign of conservative actions. If your employer seems unwilling to answer your questions, however, you can visit the Department of Labor. Tell them that you’re afraid the company may be going under, and you just want to make sure you will have access to your 401(k) money.

It would be very upsetting if you couldn’t access your 401(k), couldn’t get any information about it, couldn’t change your investments, or couldn’t take your money out. A situation like this happens most often due to a company’s bankruptcy, but it can also happen when an owner, who is also the plan’s responsible party, dies without leaving provisions for someone else to take care of the 401(k). Beginning in 1999, the U.S. Department of Labor became concerned about the number of cases of this happening across the country and made it a national enforcement project. Since then, the Department of Labor has investigated more than 600 orphaned plans and has protected $220 million in plan assets.

A recent, small-business survey sponsored by Nationwide Financial shows that many small business owners are not fully aware of their responsibility regarding 401(k) plans. If you participate in a 401(k) plan with a small business, you may want to diplomatically ask your employer a few questions to make sure that the necessary steps are in place to transfer management of the plan if emergencies occur.

Is Borrowing from a 401(k) Plan a Good Strategy when Times are Hard?

It is rarely a good idea to borrow from your 401(k) and especially during difficult economic times. There are two big reasons for that:

1. You may have to pay back what you have borrowed. If you lose your job the loan may come due. If you are not able to pay it back and you are under age 59, you will have to pay income tax on it plus an additional 10% penalty.

2. The money that you borrow stops compounding interest. That’s money for your retirement that you will not have and will never see.

If you do lose your job, you have four options when it comes to your 401(k). Ask your FFEF counselor to help you determine the best option for you:

1. Don’t change a thing. Leave your money invested in your existing plan if that is permitted.

2. Do a rollover. That means that your 401(k) dollars are taken from the existing account and deposited directly into another qualified 401(k) plan. You won’t lose any of your money due to fees or penalties. This is often possible if you are leaving one company to go to another.

3. Do an indirect rollover. In this case, you must take care of rolling over your funds yourself and you run the risk of paying a penalty. Ask your FFEF counselor to explain to you what is involved with an indirect rollover.

4. Cash in your account. You will receive the vested amount of your 401(k) minus the penalties and taxes. Keep in mind that the vested amount may not be the full amount of your 401(k) as it appears on your quarterly statement. The amount you are vested usually depends on how many years you have been employed by the company. Taxes and penalties could be as much as 22%.