How Fraud Proof is Your Employee Benefit Plan?

Benefit plans often engage third parties to assist with benefit plan administration. With actuaries, investment custodians and investment managers involved, the risk of fraud should decrease, right? Theoretically, there is increased oversight and better segregation of duties. However, having several cooks in the proverbial kitchen does not always prevent fraud. Plans are susceptible to fraud when plan administrators over-rely on third parties, or when key individuals serve in dual roles of sponsor and fiduciary.

Here are some examples of where fraud can occur:

Benefit payments

  • 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 out.
  • Terminated employees – Administrators with knowledge of terminated employees with accounts remaining in the plan with zero activity can request distributions and direct where payments are sent

Administrative expenses

  • 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 funds – Plan administrators divert forfeiture money due back to the plan to pay for personal expenses instead

Contributions

  • Failure to make contributions – Contributions from employees and employers can be diverted to the personal accounts of employees assisting with payroll and plan administration
  • Misdirecting contributions – Individuals processing contributions modify information allocating funds by the participant prior to submission to the third party administrator, and divert the funds into a personal account.

Investments

  • 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

While fraud cannot always be avoided, plan administrators can perform various activities to prevent and detect fraud, 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

 

Amisha Patel
Amisha Patel | Principal