While most 401(k) plans are safe, the Labor Department says investors can help prevent fraud by asking questions and inspecting statements for irregularities.
There was no warning.
That was the most frightening aspect about what happened recently to the 81 or so former employees of Emergi-Lite Co. in Westbrook, Conn.--no sign of impending disaster; no red flags signaling danger.
But then came a simple announcement: The roughly $1.5-million 401(k) plan--the plan that employees faithfully contributed to and were relying on to finance their retirements--was gone.
Shortly after the company opted to move to South Carolina, and dozens of workers decided to retire, the 401(k) plan's trustee faxed a note to Emergi-Lite's chief executive, saying that all of the 401(k) money had been lost to bad investments years ago, said Emergi-Lite's attorney Alan I. Sheer.
For the last half-dozen years, the trustee had perpetrated a complex fraud in which he allegedly used monthly contributions from active employees to pay the retirement benefits of former workers, according to Sheer. Moreover, he had allegedly falsified quarterly and annual account statements so promptly and meticulously that no one--from the corporation's top officers to its most lowly worker--had a clue, according to Sheer. But now, with so many workers retiring, the facade was falling apart.
"I don't know anyone who hasn't looked at their 401(k) plan after this and said, 'Is this money safe?' " Sheer said.
To Hartford-based attorney Thomas G. Moukawsher), who represents many Emergi-Lite employees, the story has a message--or rather a warning. Some 401(k) plans are not as safe as you might think. And with roughly 32 million Americans relying on 401(k) plans to provide all or part of their retirement income, that could be a frightening prospect.
The majority of 401(k) plans are safe, according to the Labor Department. The department oversees corporate compliance with the Employee Retirement Income Security Act, which governs 401(k) plans.
"There are very few situations where [401(k)] fraud goes so far that even quarterly and annual statements are falsified," said Alan Lebowitz, deputy assistant secretary of the pension and welfare benefits division of the Labor Department. "That's not to say that it never happens. It does. It is a huge universe, and there are great temptations. Sometimes people will go to great lengths to commit fraud. But, fortunately, it is very rare."
Experts believe that Emergi-Lite was particularly vulnerable.
Moukawsher said that because Emergi-Lite's 401(k) plan was small--it included fewer than 100 workers--it was exempt from annual audit requirements imposed on larger plans. In an audit, independent accountants check to ensure account statements are accurate and that adequate financial controls are in place.
In addition, most 401(k) plans allow workers to invest their retirement assets among several different options, but Emergi-Lite's plan had just one option: an investment account managed by Moore Benefit Systems, a Hartford-based company owned and operated by Gary Moore.
Most of the nation's 401(k) plans offer at least three investment choices. Had Emergi-Lite's plan included several choices, any fraud would have involved fabricating at least three returns, which would be particularly complex if workers were allowed to shift retirement dollars among accounts.
Finally, because Emergi-Lite's trustee was a corporation, it was not required to purchase a fidelity bond--a type of insurance that protects companies from embezzlement, Moukawsher said. A bond would have provided at least a modicum of protection from just this type of scam, he said.
(The Labor Department said corporations are not required to be bonded. But corporate employees who manage 401(k) plan assets generally are expected to be bonded. In any event, 401(k) fidelity bonds generally cover up to 10% of plan assets or $500,000, whichever is less; it would not have covered the entire loss.)
Moore has not been charged with any crime, and an investigation is continuing.
Moore's attorney, Marty Gold, refused to comment about any aspect of the Emergi-Lite situation, including whether Moore was bonded and what had happened to the Emergi-Lite pension.
The drama is far from over. Moukawsher has filed an administrative claim against Emergi-Lite on behalf of its workers, charging that the company had a duty to watch the trustee more carefully. Sources close to the proceedings said that both the Labor Department and law enforcement officials are investigating Moore.
The company said worker pensions may be covered by some type of insurance, but they still don't know precisely what happened. Sheer said that if the trustee lost the money in legitimate but unwise investment decisions, employees are largely out of luck. Even if the money were stolen, prospects for the employees to recover money are better because that act might be covered under an employee crime policy, he said.
In the meantime, anyone who contributes to a 401(k) retirement plan ought to take a look at his or her retirement account, Moukawsher said. Check to see whether the plan's trustee is bonded. Ask your company about what steps have been taken to ensure that worker contributions are safe.
And pay attention to warning signs, Labor Department officials said. While Emergi-Lite's workers may have had no warning, in most instances, 401(k) fraud is usually spotted by workers who notice such red flags as statements that are consistently late or error-ridden, significant drops in account balances that can't be explained by market performance, and difficulty in getting retirement or loan payments from the plan.
If you spot any of these worrisome signals, report them to your local Labor Department office.
Kathy M. Kristof is a syndicated financial columnist and author of "Kathy Kristof's Complete Book of Dollars and Sense." Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail email@example.com