“Dear Investors Column, 

I work for a company that has a 401k, but deposits my contributions and those of the company in shares of the company’s stock.

Several years ago, the company declared bankruptcy.  Luckily, I kept my job.  But I lost the $60,000 in my 401k.

Is there any way to recover any of that money?”  

Sadly, the answer is:  “No.”

But there is something that can be done beforehand to minimize the potential damage to your savings in your 401k.

When a company goes bankrupt, another company will “buy the assets” – which, luckily for the letter-writer, included keeping her on the job.  But the stock she held in the bankrupt company is worthless.

Is it possible to avoid this trap?  What should she have done?  What can you do?

Putting money into a 401k is a great idea.  Start by putting 6% of each paycheck into your 401k.  Whenever you pay off a car loan or any other type of loan, up that percentage by that amount.  You can increase your contribution to a maximum of 15% of your salary – and that should be your ultimate goal.  When it is time to retire, you will realize how good an idea that was.  Your retirement years will be very pleasant.

When the company has been deposit-ing money into your 401k for more than a couple of years, some of it will be “vested” and some will be “not vested”.  

That money which is “vested” is all yours.  The portion of the company’s contribution which is “not vested” means the company still owns that money; if you resign, the company will keep the “non-vested” portion of your 401k.  The purpose of some of your 401k account being “non-vested” is to act as an incentive to encourage you to remain employed there.  Each year’s contributions be-come “vested” over time (typically, two or three years), but the more recent year’s contribution is “not vested”.

As soon as you have a significant amount of “vested” money in your 401k, open an IRA account at a brokerage company, and transfer that part of your 401k money into the IRA.  

That money is likely to be in the form of stock, mutual funds, etc., offered as part of the 401k.

If any of that transferred money is in the form of stock in the company you work for, sell it.  

As the old saying goes, “Never put all your eggs in one basket.”  

The author of the letter above discovered the hard truth:  if the company goes bust, you not only lose your job, but you also lose your life savings.  

Being able to retire someday and live comfortably in your Golden Years just evaporated into thin air.

It is important to your own best interest and wellbeing that you consider your future, take responsibility for your future, and take the necessary actions (continuing to do so year after year) to assure that your future will be the best one possible for you.

Summary

The best prepara-tion for retirement includes: 

(1) contributing the maximum amount possi-ble into your 401k (starting at 6% of your paycheck, and increasing that up to 15%),

(2) avoid investing in your employer company if possible,

(3) opening an IRA (at a full-service broker like Edward Jones, or at a discount broker like Charles Schwab, depending on your own interest in making investment decisions),

(4) moving the “vested” portion of your 401k into your IRA every couple of years (or all of your 401k if you change to a new job in some other company), and

(5) making the effort to learn enough about investing choices to choose the best investments every year.   Your goal is to have the greatest possible growth in the value of your IRA from now until you retire.

NOTE!  Money in a 401k or an IRA has not been taxed.  NEVER move that money into your checking account, savings account, or any account which normally contains money on which tax has already been paid.  Not only will you owe tax on mon-ey withdrawn from a 401k or IRA, but the IRS will require you to pay a penalty fee as well.  You can transfer money among 401k accounts and IRA accounts, but 401k and IRA money is meant to be held until you pass the IRS-defined retirement age.

...