Jonathan Burton of CBS MarketWatch has pointed out that millions of dollars are lost by employees when their employer holds onto 401(k) funds after they are deducted from the paycheck.
It works like this. On Friday, January 1, you receive your paycheck. 12% of your paycheck has been deducted before taxes and put aside. According to regulations, your employer can hold this money (“float” it) until February 21, at which time they deposit the funds into your 401(k) account. During this float period, your employer is making money (interest) on your funds. For a large company with many employees, that adds up to quite amount of money lost to you.
It looks as if the rules will be tightening somewhat. In this age of technology, namely direct deposit and ACH, no float period is necessary.
Working for a financial services company, my guess is that my employer knows that most of its employees would be clued into to the lack of necessity of the float period. Our funds are deposited into our 401(k) accounts on the day they are deducted.
401(k) plans are not the only accounts that are affected by the float. For example, ING Direct floats money deposited for one day. That is, once you deposit money through ACH, you won’t gain any interest on it until the next business day. Most likely, ING Direct is keeping the interest it makes on that first day for the company in some form.
From the article, Employees who are surprised to find out that 401(k) contributions are held back for days or weeks should know that complaints can produce equally surprising results.
Updated October 9, 2016 and originally published January 21, 2005.