By David Babb
When pairing the word, risk, to retirement plans such as 401(k)s, most company owners and employees think only of market risk – the possibility to experience losses due to factors that affect the performance of financial markets. Though this may be the most common risk to your company’s retirement plan, there also exists the risk of FRAUD. “Fraud in my 401(k) plan?” you ask? It could happen and it has happened many times before, with some plans experiencing staggering losses. Here are some facts from 2013, provided by The Department of Labor (DOL) related to benefit plan fraud and other violations:
- 3,677 civil investigations closed
- 320 criminal investigations closed
- 88 persons indicted for employee benefit plan crimes (includes plan administrators, key company officials, and service providers)
- $1.69 billion in total monetary results from investigations and voluntary corrections
Here are some short examples of 401(k) fraud, courtesy of the AICPA’s Employee Benefit Plan Audit Quality Center:
- A husband and wife (both employees of the plan sponsor) schemed to falsify doctor’s records to receive hardship distributions.
- An HR manager requested distributions for terminated employees that had been gone from the company for two or more years, and was successful three times for a loss of over $10,000.
- A plan administrator created fictitious employees and cut checks to them. The plan administrator would subsequently cash them at local check cashing facilities using fake identification.
- A plan administrator used forfeitures to pay off personal credit card debt.
- A secretary in the plan sponsor’s payroll department was able to convince an outside payroll provider that she was allowed to suspend her 401(k) loan payments.
- The trustee of a small plan created a fictitious employee that received employer contributions. The trustee then took loans against that growing balance.
The above examples show that fraud can happen from many parties, including employees, administrators, and service providers. So now you are asking, “could this happen to my plan?” The answer is maybe.
Generally, having one hundred or more participants (with certain exceptions) in an employee benefit plan requires an audit by a firm such as BCS. These audits can catch frauds and schemes such as those above. If your plan does not require an audit, it doesn’t mean we can’t help you. There are a few simple procedures that BCS can perform to determine if fraud or other violations have occurred. These are more cost-effective than a full audit. If you would like more information regarding these procedures, please give us call and we’d be glad to discuss your options.