June 19, 2021
Is There Fraud in my EBP Plan?
The Oxford English dictionary defines fraud as a “wrongful or criminal deception intended to result in financial or personal gain.” Why would someone commit such a deceitful act? You may be thinking, “I have a 401(k) plan and my assets are held by a trustee, so that must mean my retirement assets are safeguarded,” but have you really considered what makes a plan susceptible to fraud?
Fraud is real and can happen to you
Picture the following scenarios:
- The former owner of a company served as the trustee of the company-sponsored 401(k) plan and misappropriated $43,380 from participant accounts for personal use, by impersonating four different plan participants and altering account and contact information to inappropriately obtain distributions from these participants’ accounts.
- A former business associate and office manager of an organization embezzled $120,313 in employee elective deferrals that were to be deposited into an employee 401(k) pension fund, as well as $587,218 from bank accounts belonging to the organization.
These are a few real life examples of fraud perpetrated against employee benefit plans and published by the AICPA. In these instances, the criminals were caught, but what about instances that are not caught?
Where can fraud occur in your plan?
Generally, multiple parties may be involved in administering a plan, including record keepers, investment custodians and advisors, and actuaries. Plans can be more susceptible to fraud when plan administrators become overly dependent on these third parties. The following are some examples of what could go wrong in benefit plans, even when outside vendors are involved:
- Hardship distributions – medical bills, tuition bills, and other documentation to support hardship withdrawals are easily falsified
- Pensioner distributions – Eligible pensioner is deceased, but payments have not ended. Distributions sent in the form of checks could be fraudulently endorsed by an ineligible relative/friend or electronic payments could continue to be paid
- Terminated employees / missing participants – Administrators with knowledge of (a) terminated employees with accounts remaining in the plan with zero activity or (b) missing participants who have not been reached, can request distributions and direct where payments are sent
- Failure to make contributions or misdirecting contributions – Contributions (employee and/or employer) can be diverted to the personal accounts of employees assisting with payroll and plan administration prior to submission to the third party administrator. Contributions can also be misallocated and additional contributions could be made to their own retirement accounts instead of properly allocated to other employees’ accounts.
- Fictitious vendors – Fraudulent invoices generated by plan sponsor employees make payments appear to be related to plan administration
- Improper allocation of shared expenses – Plan expenses intended for a certain class of employees, i.e. highly compensated employees, could be improperly allocated to other participants
- Personal expenses paid by plan funds – Plan administrators can divert forfeiture money due back to the plan to pay for personal expenses instead
- Inflated investment values – Investment managers cash out or divert securities while presenting falsified investment values to plan sponsors
- Investment income diverted – Investment earnings due to the plan or its participants are redirected by those with administrative access to their personal accounts
Prevent fraud before it happens
Plan administrators can perform various internal control activities designed to prevent fraud before it happens or detect it more timely, such as:
- Require key parties involved in plan administration to sign a conflict of interest statement
- Develop a whistleblower policy or other avenue where employees can report fraud
- Periodically send requests for proposal for third-party services
- Ensure proper segregation of duties in key areas, such as cash handling and payroll
- Verify that employees’ administrative access does not exceed the level required to perform their job function
- Perform periodic death audits of pensioners receiving benefits
- Perform periodic audits of key areas, such as participant contributions and distributions
- Perform periodic reviews of accounts of individuals who have administrative access and/or are involved with plan administration
The DOL also has a list of 10 warning signs of 401(k) contributions being misused.
It is important to recognize that incentives/pressures, opportunities, and rationalizations may exist and if so, there is greater potential for fraud to occur. Being mindful of what to keep your eyes and ears out for can help to prevent or detect it.