People are saving more and investing more appropriately for their age, according to a recent Fidelity Investments Retirement Savings Assessment study. As a result, the number of people who are likely to afford at least their essential expenses in retirement – things such as housing, healthcare, food and the like – climbed seven percentage points since 2013, from 38% to 45%. Still, 55% of people are estimated to be at risk of being unprepared to cover their essential living expenses during retirement.
According to Fidelity, one of the best ways to improve retirement readiness is to raise savings. (Other steps include reviewing your asset mix and retiring later.) There are some relatively easy ways to boost savings. For example, you can invest your raises, increase contributions to your workplace savings plan (even a small increase of just 1% can make a big difference over time), and maximize any tax-advantaged savings vehicles, including 401(k)s, 403(b)s and IRAs.
The ultimate value of your retirement account depends on many factors, including how much you save each year, your time horizon and the performance of the investments. But there’s something else that can undermine your retirement account: creditors. Many assume that their 401(k)s and IRAs are protected from creditors, but depending on the type of retirement plan you have – and the state you live in – that’s not necessarily the case.
ERISA-Qualified Retirement Accounts: Protected
In general, retirement accounts that qualify under the Employee Retirement Income Security Act (ERISA) are protected from creditors, bankruptcy proceedings and civil lawsuits. To be ERISA-qualified, a retirement plan must be set up and maintained by your employer (and/or a separate employee organization), and it must comply with federal rules regarding reports to plan participants, funding and vesting. Common types of ERISA accounts include 401(k) plans, deferred-compensation plans and profit-sharing plans. If you’re unsure about your plan’s status, contact its administrator.
Employee Welfare Benefit Plans: Protected
In addition to employer-sponsored plans, ERISA may cover employee health and welfare benefit plans. Common ERISA-covered plans include medical, surgical, hospital or HMO plans, health reimbursement accounts (HRAs), health flexible spending accounts (FSAs), dental and vision plans, prescription drug plans, disability insurance, life insurance and 419(f)(6) and 419(e) welfare benefit plans. The assets in these plans are typically held by an independent trustee, and, as with many employer-sponsored plans, are exempt from seizure by any creditors.
Non-ERISA Retirement Accounts: Not Always Protected
Plans that are not ERISA-qualified do not offer the same level of protection when it comes to creditors, bankruptcy and lawsuits. Common types of non-ERISA retirement accounts include IRAs (traditional and Roth), simplified employee pension plans (SEPs), SIMPLE IRAs, Keogh Plans, 403(b) plans, government plans, church plans and plans that don’t benefit employees (employer-only plans).
Although IRAs are not ERISA-qualified, the funds are protected under a separate law – the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – but only if you file for bankruptcy. Depending on the state you live in, your IRA and other non-ERISA plans may – or may not – be protected from creditors. Some states shield IRAs in nearly all instances, for example, while others offer only limited protection. (For more, see Bankruptcy Protection for Your Accounts.)
The Power of the Anti-Alienation Clause
An important feature of ERISA-qualified plans – such as 401(k)s – is the anti-alienation clause, which states that funds deposited in a qualified retirement plan are held by the plan administrator for the benefit of plan participants, and participants cannot freely sell, transfer or give them away. The clause also states that your rights to the benefits can’t be taken away, which effectively prevents creditors from getting your plan. The funds are not legally yours until you withdraw them as income during retirement, so they can’t be used to satisfy personal debts.
Exceptions: When Protected Plans Are Vulnerable
ERISA-qualified plans may be at risk under certain circumstances and can be seized by:
- Your ex-spouse, under a qualified domestic relations order (QDRO), to the extent of your ex-spouse’s interest in the benefits as a marital asset or as part of child support (see Divorcing? The Right Way to Split Retirement Plans for details)
- The IRS, for federal income tax debts
- The federal government, for criminal fines and penalties
- Civil or criminal judgments, in cases of your own wrongdoing against the plan
The Bottom Line
While many employer-sponsored retirement accounts – including most 401(k)s – are protected against creditors, that’s not always the case. If you have questions about your plan – and whether or not it is ERISA-qualified – speak with its administrator. (For more, see Build a Wall Around Your Assets.)