Is Your 401(k) Plan Secure?
Money deducted from your paycheck for retirement typically gets deposited quickly into your 401(k) plan. But this isn’t always the case. Sometimes this money ends up in another account. In most circumstances, the missing money is nothing more than an unintentional mistake; other times it is a case of embezzlement. Therefore, employees and executives need to understand how to protect themselves and safeguard their retirement assets.
On December 5, 2012, the Labor Department won a suit against B & K Builders of Marshfield, Wisconsin. The case alleged that co-owners Kenneth Staab and Robert Aschenbrenner had failed to remit 401(k) contributions that had been withheld from employee paychecks for three years. After a slew of legal fees, the owners were removed as fiduciaries, and the plan was required to return $22,847.86 back to employee accounts.
How to Spot Retirement Plan Fraud
Retirement plan fraud is more common than you might think. For the first six months of 2013 through the end of June, the Department of Labor’s Employee Benefits Security Administration (EBSA) oversaw 171 cases with over $4 million in participant contribution recoveries. And that doesn’t count the number of cases that have yet to be caught. Both employees and their employers should pay attention to the following red flags as evidence that something may be amiss.
Missing or tardy contributions. If you don’t see your paycheck deductions deposited in your 401(k) account soon after your payment period, you may have a problem. The Department of Labor has issued guidelines suggesting that small businesses should deposit this money within seven days. When these cases are prosecuted, delinquent businesses will owe both principal and opportunity cost interest.
Contributions don’t reconcile. Another problem could be occurring if your deposit is less than your deduction. There are cases where a payroll servicer skimmed 401(k) funds into their own account before making deposits. The basic rule of thumb is to review your retirement plan statements carefully, just as you would your bank account, and check against your paycheck stubs.
Unusual investments. Another red flag to consider occurs when a 401(k) plan invests in assets that are not publicly priced and traded. Just over a year ago, the Department of Labor found a 401(k) plan trustee guilty of using $3 million in 401(k) assets to purchase an interest in a golf resort used by this same person. The Employee Retirement Income Security Act (ERISA) law of 1974 clearly states that a plan fiduciary cannot use plan assets for the benefit of a party-in-interest. This includes a prohibition against loaning funds to a party-in-interest.
If you believe there is an act of fraud in your 401(k) plan, you can contact the Department of Labor and request an investigation. Alternatively, if you oversee the plan and discover a violation, employers can begin a voluntary process to correct it before litigation is required.
How to Prevent Fraud
To protect employees from losing stolen money, all qualified retirement plans require a fidelity bond. These bonds are a form of insurance and need to be purchased from an insurer named on the Department of the Treasury’s listing of approved sureties. Fidelity bonds must be no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. Thus a plan including total assets of $800,000 requires an $80,000 bond, but a $10 million plan only requires a $500,000 bond. The maximum amount increases to $1 million for plans that directly hold employer securities.
I typically recommend that employers who offer a 401(k) plan get a multi-year bond that allows an increase in the bond amount each year. You typically receive a healthy discount by purchasing a multi-year plan, and all you need to do is call in once a year and update the fidelity bond company with your latest account value.
Although employees are covered by a company’s fidelity bond, these bonds typically do not cover others who also handle retirement plan assets. This requires that an employer also confirm that payroll providers and any others who have the ability to transfer funds carry their own bonding.
You can review your plan’s 5500 annual Department of Labor retirement plan report to see the prior year’s total account value and fidelity bond amount. Brightscope.com has created an easily searchable free database to help you find your own company’s 5500.
Taking some simple steps to review your 401(k) will ensure that the plan is compliant with best practices.
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