In 2010 the Department of Labor (DOL) had 281 criminal investigations, and they indicted 96 individuals for defrauding a retirement plan. Improper withdrawals from a retirement plan may be a civil crime, but if the withdrawal is followed by lies, concealment or a cover up, then it becomes a criminal case.
Fraud prevention is much less expensive than fraud penalties. Fraudulent activity is considered by the DOL to be a Prohibited Transaction. Prohibited transactions are corrected by:
- Making the plan whole by returning funds, or reversing the prohibited transaction
- An excise tax penalty equal to 15% of the amount of the prohibited transaction is imposed on the plan fiduciaries. This is a personal non- deductible expense.
- If the prohibited transaction is not corrected timely (usually within 12 months), then the excise tax increases to 100% of the amount, and the prohibited transaction must still be corrected.
Trust but verify. It’s often the person who is trusted the most who is the one who commits fraud. No matter how long someone has been with the company, or how much you trust him/her, check her work at irregular intervals. Check different things each time. Make sure that all reports tie out across systems (payroll, accounting, banking and retirement plan)
Share the responsibilities. If different people are involved in different aspect of the Plan it is much more difficult for one person to commit fraud. Separate the responsibility for remitting contributions, bank reconciliation, and validation of deposits to the plan. Have internal policies and procedures manuals that can be followed by anyone, even if one of the people is not present.
There are a variety of warning signs that fraud may be afoot. Plan sponsors should investigate further, preferably by a third party, if they see any of these red flags:
- Participants start asking questions about their account
- There is a significant drop in value of the plan assets that is not explained by market fluctuations
- Distributions are delayed or for the wrong amount
- Investment statements or reports are late or arrive at irregular intervals
- Checks or deposits are getting “lost”
- Noticeable changes to a person’s lifestyle – lavish living, drug, alcohol or gambling problems
EXAMPLES OF FRAUD SCHEMES
Desperate people do desperate things. People who perpetrate fraud are often very clever. Victims of fraud often look back at the situation and realize that it should have been very clear to them what was happening. Here are some examples of fraud schemes that are common to retirement plans:
- Contributions from payroll deductions are not sent to the plan. For example, the payroll clerk may choose instead to divert the funds elsewhere.
- Employer contributions are not sent in to the plan. For example, the controller may send in a partial payment or irregular payment to keep questions from being asked by the employees.
- Benefit payment schemes where funds are paid from the plan to people other than the plan participant. For example, the HR manager knows that several employees no longer work at the company. Their statements are being returned as undeliverable. He decides to commandeer those accounts for his own benefit.
- Investment fraud. For example, does Bernie Madoff ring any bells? Enough said.
Fraud prevention is important for every business owner, and is critical for sponsors of retirement plans. As a Third Party Administrator, we provide plan sponsors with an outside look at the plan to help prevent fraud. We have also built in some cross checks in our year end data request packages to help ferret out discrepancies in plan records. Having that level of review is a good insurance policy for our clients. Trust but verify!
Please let us know if you have more questions about fraud prevention for retirement plan sponsors.
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