David I Gensler, MSPA, MAAA, ACOPA, EA
Two unrelated occurrences illustrate that while it is difficult to steal money from a retirement plan, it is certainly not impossible.
TPA SCHEME FAILS
From 2013 through 2017, some 300 workers at Ferguson Electric and Ferguson Mechanical had deductions of $1.60 to $3.15 per hour taken from their fringe benefits package as a “third party administrator fee” for the employees’ pension plan. These funds (which added up to $3.3M) were mailed to TPA of Connecticut which then forwarded the money to DJS associates.
Charging participants for TPA related services is not unusual. In this case though, there were no TPA services being performed. Both TPA of Connecticut and DJS Associates was wholly owned by Lee Ferguson. Yes, that is the same Lee Ferguson that owned Ferguson Electric and Ferguson Mechanical.
DJS Associates’ stated business purpose was to perform business consulting services for the two Ferguson companies. In fact its only business purpose was to receive funds from TPA of Connecticut. TPA of Connecticut only business purpose was to be a conduit to DJS Associates to funnel the funds taken from the employees. In this case, no money was actually taken from the plan.
Mr. Ferguson has pleaded guilty to one count of money laundering and will face up to 10 years in prison. He is scheduled to be sentenced on October 24th.
FORMER RECORDKEEPER EMPLOYEE SENTENCED IN ESCHEATMENT SCHEME
In a separate incident, an employee of Vanguard stole over $2.1M from dormant accounts. Scott Capps of Coatesville, PA stole the passwords of subordinates and used those passwords to access the system used to issue checks. He then submitted requests to have checks issued on certain dormant accounts to co-conspirators. After depositing the checks into their own account, the co-conspirators then issued checks back to Mr. Capps.
Earlier this year, Capps pleaded guilty to all counts in an indictment charging him with conspiracy to commit mail fraud, money laundering and filing false tax returns (obviously, Mr. Capps never reported the stolen money as income).
While the thefts occurred during the period of 2011 to 2014, Mr. Capps had worked at Vanguard for 23 years. The dormant accounts were due for escheatment, which is the process of turning over abandoned funds to the state. Mr. Capps was sentenced to 48 months in jail; three years supervised release, restitution of $2,137,580 and forfeiture of $648,600.
Both of these acts of malfeasance would have been really hard to discover. In the first one, no funds were ever actually taken from the retirement plan. The employees’ paychecks were reduced for retirement related services that were never actually performed. In the second one, Mr. Capps carefully targeted dormant 401(k) accounts, understanding that the likelihood of the participants complaining about this was remote. If the account had been dormant for many years, the probability of anyone noticing that money was missing was extremely low.
Which got me to thinking. How much money might be in 401(k) plans that could be categorized as dormant? Millions? Billions? Participants with a vested account balance of less than $5,000 can be rolled out of the plan, over to certain pre-approved financial institutions. There are certain IRS approved procedures that must be adhered to before you roll out the money. Reviewing the plan and identifying how many former employees fall into this category might be a worthwhile endeavor. Many plans get charged a per participant fee so clearing these former employees off of the books might save the plan or the plan sponsor some money. Also, plans with more than 100 participants require a CPA audit. Since former employees with account balances get counted as active for purposes of the plan audit, you might be able to reduce the number of active employees down low enough to eliminate the audit. That would eliminate the auditing fee.
That could really create some significant savings.
Based upon August 5th and August 26th articles in the National Association of Plan Advisors (NAPA) newsletters