On a Sinking Ship? Keep Your 401(k) OK

If you’re concerned that your company is headed for failure and want to make sure your retirement funds don’t do the same, experts say the best thing you can do is to limit your exposure to employer stock in your company 401(k).

On the other hand, old-fashioned “defined benefit” pension plans, in which the employer promises to pay you a certain amount of money every month once you retire, are protected by the Pension Benefit Guaranty Corporation. The PBGC is a federal agency which will pay you at least part of what your company has promised if the company’s plan is underfunded and the employer cannot make good on its pension obligations.

Recently, companies such as United States Steel Corp. (Stock Quote: X), the New York Times Co. (Stock Quote: NYT), and Kimberly-Clark Corp. (Stock Quote: KMB) all stated that 2008's horrid stock market impact on pension assets had eroded their year-end earnings. Employees concerned about traditional pension plans at companies like these can learn more about PBGC’s maximum monthly guarantees here .

But whereas PBGC-backed plans have retained popularity with many employers, overall the number of private defined benefit (DB) pension plans where employers are on the hook for funding and performance have declined rapidly since the late 1970s, and today, an employee is much more likely to have a so-called defined contribution plan such as a 401(k).

With a 401(k), it is the employee who gets stuck with losses when performance declines—not the company—and the employee is usually the one deciding where the money is invested.

"The bottom line is that the money in a 401(k) belongs to the employee, rather than the employer,” says Keith Newcomb, a financial planner at Full Life Financial LLC in Nashville, Tenn.

The good news here is that the financial health of your employer needn’t impact your 401(k) plan in any fashion, unless you have invested a good portion of the plan in company stock and then that stock takes a dive.