Enron Workers Not Alone, Others Now Face Prospect of "Homeless 401k's," Sharp Tax Bite

Some Ex-employers Dumping Low-Balance 401k Accounts Ahead of New Tax Law Rules; Unprepared Workers Can Face 20 Percent Tax Bite and 10 Percent Tax Penalty.

Enron workers are not the only Americans getting unwelcome news this year about their 401k plans. Almost no attention has been paid so far to American workers who recently have lost or switched jobs and are discovering that their retirement savings at former employers are now "homeless 401ks," according to a warning issued today by Pax World Funds and the 401khelpcenter.com.

The driving force behind the surge in "homeless 401ks" is a tax law change passed by Congress in 2001 that has not yet gone into effect, pending its adoption into rules at the U.S. Department of Labor (DOL). Ironically, the tax law change was designed to encourage - rather than discourage - the "portability" of 401k plan savings by requiring employers who want to dispose of low-balance 401k accounts between $1,000 and $5,000 to automatically rollover the balances into an IRA account with no tax penalties for the ex-employees. Currently, employers can notify any ex-employee with 401k assets under $5,000 that he or she must make arrangements to rollover the funds or be issued a check for the balance. In the event the check is cut, the former employer automatically withholds 20 percent of the balance to apply to taxes due. Any ex-employee who unwittingly cashes the check, rather than putting it into an IRA or another qualified retirement plan, must pay income tax on it plus pay an additional 10 percent tax penalty.

Rather than wait for the new DOL rules to be issued and go into effect, a number of employers are ridding themselves of low-balance 401k accounts while they still can at the lowest possible administrative cost. Though no data exists to show the extent of the problem for workers, there have been a number of cases in which individuals either receive notification that they are about to have a "homeless 401k" or, in some instances, simply get an envelope with a check.

This is the type of scenario playing out all over America today: A security technician who switched jobs in 1999 and 2001, Jeff Green of Liberty, Missouri, recently received notice from two different financial institutions that his previous 401k accounts totaling $3,400 were being dumped. The notices, which focused on the impending "cash out" of his account, were filled with technical language that did not stress his right to request a direct rollover into an IRA. Had Green's wife not been in the financial industry, he unwittingly would have cashed the checks and incurred the 10 percent tax penalty.

Pax Director of Shareholder Services Maureen Conley explained: "The 'homeless 401k' problem is very real for Americans who, in some cases, have been laid-off or forced to take lesser employment in anticipation of job cuts. In some cases, we are talking about people who are idled between jobs, due to the recession. Tragically, the current tough economic times increase the pressure on ex-employers to cut costs by dumping low-balance 401k accounts while they still can before the new tax rules go into effect."

Pax World Funds President Thomas W. Grant said: "Pax World Funds is calling attention to this so-far ignored problem because we want to make sure that people know the facts and what options are available to them. Pax World has a long-standing tradition of offering low-minimum mutual fund and IRA accounts. We want to make sure that people who have been abandoned by their 401k's know that they have a place to go. As a socially responsible institution, we make it part of our mission to assist people because it's the right thing to do and because it's good business."

Investors may request information on how to open a low-minimum initial investment Pax IRA account by calling 1-800-767-1729 or visiting Pax World on the Web at www.paxfund.com. To assist workers who fear that they have - or may soon experience - 401k portability problems, Pax World Funds is making available the step-by-step fact sheet "How to Avoid Being a 'Homeless 401k' Victim" is available at www.paxfund.com/401kwoes.html

HIGHLIGHTS OF "HOMELESS 401k" FACT SHEET

The Pax World Funds fact sheet "How to Avoid Being a 'Homeless 401k' Victim" is geared to people in three situations:

• Individuals with low-balance 401ks at former jobs who have not yet received notification that they are about to be dumped.
• Individuals who already have been notified by an ex-employer that their low-balance account must be rolled-over or cashed out.
• Individuals who - with or without notice - have received a check from an ex-employer from their low-balance 401k accounts.

For each of the three scenarios, the Pax World Funds fact sheet outlines what steps workers should take to protect their savings and, if possible, avoid the double whammy of paying taxes and a related penalty for early withdrawal.

401khelpcenter.com Editor Rick Meigs said: "People with a 'homeless 401k' who find themselves with a check have to resist the temptation to simply cash it and spend it. Remember: You've already lost 20 percent to withholding and face an additional 10 percent tax penalty. If you are young and just starting to save for retirement, the early dollars are the ones that add up the most in the end. Do the smart thing: Open an IRA, deposit the former 401k dollars into it, scrape up the 20 percent paid out in taxes in order to avoid the 10 percent penalty. Think of this as an important first step in the process of committing to save for your retirement."

ABOUT PAX WORLD FUNDS

Pax World Funds - including Pax World Balanced Fund, Pax World Growth Fund, Pax World High Yield Fund and Pax World Money Market Fund - seek to enable persons of conscience to invest in keeping with their ethical values and to challenge corporations to establish and meet certain ethical standards. The Funds invest in companies that produce goods and services that improve the quality of life such as health care, technology, housing, food, education, pollution control, utilities, and leisure-time activities. The Funds do not invest in companies that make defense or weapons-related products or that derive revenue from the manufacture of tobacco, alcohol, or gambling products.

For more information, contact: Stephanie Kendall, 703-276-3254 or skendall@hastingsgroup.com.