There are protections for your 401(k) account in many situations. This article explains what happens to your money in scenarios like bankruptcy or business closure, and which institutions back up different parts of your account.
Federal law protects your 401(k) assets in several common situations.
Under federal law, all retirement plans covered by the Employee Retirement Income Security Act (ERISA) include an anti-alienation provision. This means your 401(k) assets are generally fully protected from creditors, even in bankruptcy.
There are some exceptions to this protection. Your assets may not be protected in these situations:
Certain divorce cases where payment to an alternate payee is required under a Qualified Domestic Relations Order (QDRO)
An Internal Revenue Service (IRS) levy or judgment — the IRS can force a distribution, but only when you're otherwise eligible to take one under your plan's terms
Criminal or civil judgments involving plan-related crimes or activity
Cases involving a fiduciary violation or criminal activity
For ERISA creditor protection to apply, your plan must be covered by ERISA. Most Gusto 401(k) plans qualify.
Note: Owner-only plans — also called one-participant plans, Solo(k), Individual(k), I(k), Indy(k), or uni(k) — are not covered by ERISA. These plans allow only the business owner and their spouse to participate. If your plan is owner-only, your state's laws determine creditor protection, not federal law.
Federal law requires all ERISA-covered plans to hold assets in a trust at a bank or IRS-authorized organization. If your employer goes out of business or files for bankruptcy, your deposited assets are fully protected. Your employer and their creditors cannot access funds in the plan's trust.
Important: You may experience a temporary delay in taking distributions while we work with your plan sponsor to terminate the plan, or with the Department of Labor if your plan sponsor is unresponsive.
The one exception involves contributions that were not deposited before your employer declared bankruptcy. In that case:
The plan becomes a creditor in the bankruptcy proceeding
Whether those amounts are ultimately deposited depends on your employer's available assets and creditor priority
Employee contributions withheld from your pay but not yet submitted to the plan are treated as general creditors under bankruptcy law — they are not considered unpaid salary
We plan to be in business indefinitely, but if we ever need to wind down, we will work with your employer to transfer your plan to another qualified service provider.
In the unlikely scenario that a transfer cannot happen, your funds will continue to be held by your plan’s custodian:
If your account is held at Benefit Trust Company (BTC), BTC — a privately held, independent trust company with over $14 billion in assets under management — acts as custodian.
If your account is held at Gusto Brokerage, LLC, Gusto Brokerage — an affiliated broker-dealer registered with the Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC) — acts as custodian.
If you have an IRA, Forge Trust Co. acts as your IRA custodian, and your IRA assets are held in a Gusto Brokerage account.
An ERISA fidelity bond is a type of insurance that protects your 401(k) plan against losses caused by fraud or dishonesty by individuals who handle plan funds.
In addition to our internal safeguards, we maintain an ERISA bond covering your plan. This bond provides protection if a claim is filed for lost plan assets resulting from fraudulent or dishonest acts by us, our employees, or agents. Your plan sponsor may also carry coverage that protects plan assets from negligent actions on their end.
Note: ERISA generally requires any person who handles funds or other property of an employee benefit plan to be bonded. Ask the plan administrator at your employer whether individuals who manage the 401(k) plan have additional bonding.
Several federal institutions provide coverage for different types of accounts and assets. Here's how each one applies to your Gusto 401(k).
The Pension Benefit Guaranty Corporation (PBGC) is a quasi-governmental organization that provides insurance for pension plan assets. It is funded by premiums paid by covered plans and operates outside the normal federal budget process.
Important: The PBGC only covers traditional defined benefit pension plans. Your Gusto 401(k) is not covered by the PBGC.
The Federal Deposit Insurance Corporation (FDIC) provides insurance for customers of depository institutions, like banks. FDIC insurance covers cash and cash-equivalent accounts, but does not cover securities like stocks, bonds, or mutual funds.
401(k) plan cash, the assets in your 401(k) account that are held in cash or a money-market deposit accounts at a bank may be eligible for FDIC “pass-through” insurance. If applicable regulatory requirements are satisfied, each 401(k) plan participant’s non-contingent interest in such deposits is separately insured, up to the current maximum limit of $250,000 per participant.
SIPC insurance protects customers of SIPC-member broker-dealers - such as Gusto Brokerage - against the loss of cash and securities if the SIPC-member firm fails. SIPC protection does not apply to assets held at non-broker-dealer custodians (e.g. BTC). SIPC protection only covers Gusto Brokerage’s custody function — restoring customers’ securities and cash that are in their brokerage accounts — in the event of Gusto Brokerage’s liquidation.
If your 401(k) account’s assets are held at Gusto Brokerage, rather than BTC, the assets should be covered by SIPC protection up to the current maximum of $500,000, which includes a $250,000 limit for cash.
Note: FDIC and SIPC protect against a bank’s or brokerage firm’s failure including assets that go missing due to the firm’s own fraud or theft but they do not cover investment losses, bad investment advice, or fraud committed by a third-party.