Know Your Rights Under ERISA to Prevent Pension Fraud
August 06, 2020
By Michael Bentivegna
A pension is one of the most valuable assets for an individual, a nest egg for his/her retirement and part of a career-long plan for financial security. In the 1960s, approximately 50% of the private sector workforce had a pension. According to data from the Bureau of Labor Statistics, in 2018, only 17% of private industry employees were offered a traditional pension plan. Although the traditional pension plan, also known as a defined benefit plan, may be falling by the wayside, many believe that pensions are still a hotbed for fraud. This belief is due in large part to the general nature of a pension: the large amounts of money accumulated over time that are inaccessible to the intended recipient until some future point in time.
Fraud is defined as a wrongful or criminal deception intended to result in financial or personal gain, and can be committed internally or externally by employers, employees, third-party vendors or others. Pension fraud involves the use of deceit or misrepresentation in connection with a pension fund. The two main types of pension fraud center on (1) providing the pension benefits; and (2) stealing a person’s pension benefits.
The employer, plan sponsor, custodian, recordkeeper or fund manager usually commits the first type of aforementioned pension fraud. This fraud can involve the employer denying pension benefits (e.g., denying the spouse of an employee’s pension benefits after the employee passes away), or the managing of fund assets not in accordance with the investment policy statement. The fund manager may inflate the value or performance of the fund, effectively overstating its funded status, or under-report the fees charged to manage it. Plan sponsors can also use unreasonable assumptions, such as a higher discount rate, which could result in a lower liability and an overstatement of a plan’s funded status. Fund managers might commingle pension funds with their own assets, including the outright theft of pension funds.
The second type of fraud is geared toward obtaining the retirement benefits of another person through stealing or misappropriation. This can even involve ID theft of an individual in order to impersonate a pension holder and receive their benefits. A common occurrence is when a pension recipient passes away and someone, say their child, does not properly notify the company or fund. The child continues to cash or withdraw the pension funds for their own use, to which they were not entitled.
There are other types of pension-related fraud, such as falsifying records, tax fraud, and fraud specifically aimed at the elderly. Any fraud committed where a pension is directly or indirectly targeted can constitute pension fraud even for, say, a mortgage or loan where the funds are withdrawn from a person’s pension. The AICPA groups employee benefit plan frauds into the following seven categories, which are highlighted with an example for each:
- Distributions - A bookkeeper made checks payable to herself and modified the bank statements to exclude cancelled checks. The bank cashed the check. The fake pensioner check was found by the plan while reconciling the account. The auditor found the fraud during confirmation of bank balances.
- Expenses/Forfeitures - A plan paid for recordkeeper services, and the custodian also paid for the recordkeeper services as an indirect payment. No disclosure was made by the custodian who saw both payments being made. The trustees sued both the recordkeeper and the custodian.
- Participant Loans - A secretary in the plan sponsor’s payroll department convinced the outside payroll service that she was allowed to suspend her 401(k) loan payments. This was unknown to both her employer and plan administrator and was discovered during the annual audit, at which time the plan sponsor and employer were notified.
- Eligibility - A person was offered a job but never actually started. The plan sponsor entered the person as an employee into the HR system, enrolled the person in the plan, and then started issuing paychecks with deductions for contributions to the plan. Three years later the employee running the scam requested a distribution at which time the fraud was discovered.
- Contributions - An HR department employee, who also assisted with payroll, diverted both payroll taxes and plan contributions into their personal account for six months and then left the country. This employee also reconciled payroll bank accounts.
- Investments - An outside investment manager for a defined benefit plan reported investments and investment gains that did not exist.
- Other - A director of a plan administrator’s defined benefit plan embezzled approximately $3 million dollars from the plan over several years. The director used $2 million to pay bogus expenses to bogus companies he created. These expenses were recorded as miscellaneous plan expenses. The money eventually flowed to the director. The plan has $1 billion in assets, and the amount taken was under the auditor’s materiality level. The fraud was caught by the DOL. The director was found guilty and sentenced to jail.
Remember, an employer and the fund manager have certain fiduciary duties and employee obligations. Under the 1974 Employee Retirement Income Security Act (“ERISA”), employers and fund managers can be held liable for damages sustained when employees are defrauded of their pension assets. ERISA does not require employers to offer a pension plan, but it sets minimum standards for the pension plans in private industry. Some of these ERISA requirements, per the DOL, are:
- Requires plans to provide participants with information about the plan, including important information about plan features and funding. The plan must furnish some information regularly and automatically.
- Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, accumulate benefits, and have a non-forfeitable right to those benefits. The law also establishes detailed funding rules that require plan sponsors to provide adequate funding for a plan.
- Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides plan investment advice. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring plan losses.
- Gives participants the right to sue for benefits and breaches of fiduciary duty.
- Guarantees payment of certain benefits if a defined plan is terminated through the Pension Benefit Guaranty Corporation.
Everyone should be aware of his or her rights under ERISA, more specifically the provisions in the plan document that are required to be provided to participants. There are a number of contacts you can notify if you suspect pension fraud. These include your HR department, specifically those in charge of administering employee benefit programs; local or state law enforcement; the Employee Benefits Security Administration; corporate or personal counsel; or the Securities and Exchange Commission if it pertains to a publicly traded company.