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Make Sure Your Employer Isn't Misusing 401(k) Money

Sonja Ryst

After working for around 30 years at the Oak Park, Ill., material analysis firm Chicago Spectro Service Laboratory Inc., engineer Raymond Reinheimer thought he had saved well over $200,000 in his profit-sharing plan.

But when Reinheimer retired some years ago, the money wasn't in his account. He and other employees had gotten phony statements each year that said promised contributions were made into the plan -- even though they really weren't.

To get the money back, Reinheimer had to endure around five years of litigation before he won a settlement. Now, he receives $3,000 per month for his retirement.

"He would have had a much better lifestyle had he not been cheated," says Reinheimer's attorney, Alan Bruggeman of Bruggeman, Hurst & Associates Ltd. "If he'd have had $250,000 in an investment account, he would have gotten more."

The Department of Labor said in June 2005 that Chicago Spectro's owner, Richard Goldblatt, was removed from his role as the plan's fiduciary.

Goldblatt declined comment on this article.

While Reinheimer's case was severe, employers can misuse employee contributions into 401(k)s in many ways. The problem has attracted regulators attention for years.

Companies of all sizes have to move employee contributions into pension plans no later than the 15th business day of the month following receipt of the money.

The DOL said in recent weeks that it's proposing a new rule, which would require pension and welfare benefit plans with fewer than a hundred participants to transmit employee contributions within seven days instead.

"The proposal we made is the result of a longstanding look at the issues and our goal was to help increase compliance and provide certainty," says Bradford P. Campbell, Assistant Secretary of Labor for the Employee Benefits Security Administration.

As it is, employers rarely misuse the contributions their participants make into 401(k)s. Of the 436,000 401(k)-type plans in the U.S., the DOL cites about 1,100 annually for violations relating to delinquent employee contributions.

"It's tough for it to happen under current laws because of the speed with which contributions have to be made to trustee accounts," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington. He pointed out that the vast majority of 401(k) plans have many eyes on them, because third parties such as mutual-fund or life-insurance companies will typically be involved.

Plan providers are often divisions of companies such as Wells Fargo(WFC Quote), Wachovia(WB Quote), Principal Financial(PFG Quote) and JPMorgan Chase(JPM Quote).

Meanwhile, company tax filings will leave an easy audit trail, Salisbury adds.

Despite such challenges, experts say that companies can misuse employee contributions in a myriad of ways and for different reasons. The DOL lacks the resources to verify that all companies have been making employee contributions into 401(k)s as reported in filings, and only does such audits on occasion.

"The two most common problems we have are late remittals or the failure to remit at all," says DOL spokesman Brad Mitchell. "We find this quite often when businesses are going through slow times and they need capital, and so they use the money (in employee retirement plans) that doesn't belong to them."

Look at the case of Duke's Body Shop in Crystal, Minn.

Sheila Bergen, who had responsibility for the Minneapolis auto body repair company's corporate account at the time, allegedly used employee contributions owed to the company's savings incentive match plan to pay for the company's operating expenses, the DOL said on Jan. 18.

The agency is suing to restore more than $25,000 in contributions owed to the plan and to remove Sheila Bergen as the plan's fiduciary.

Ms. Bergen, who has since become the owner of Duke's Body Shop, did not respond to a request for an interview.

There are other ways companies may be misusing 401(k) dollars, as well.

The DOL said on Feb. 26 that it has sued Knoxville College for an alleged $14,725 in employee contributions that were diverted from the participants' individual retirement savings plans. The school, which had been struggling financially for many years, also allegedly made additional mistakes, such as failing to maintain an adequate fidelity bond to protect participants from the risk that a fiduciary mishandles their assets.

Knoxville College declined to comment on this article.

What can you do to avoid becoming an unlucky 401(k) holder?

Industry experts advise that you do more than merely watch your account statement carefully to make sure that it always reflects the right amounts and that you authorized all the investments in it.

Red flags include 401(k) statements or benefits payments that consistently arrive late or at irregular times. And, you might want to ask questions if you hear about things like frequent changes in who manages your 401(k)'s investments, or bizarre money deals being struck between your employer and a plan trustee.

Should you need help to resolve such concerns, any consumer with a complaint or a question about a 401(k) plan can call the Employee Benefits Security Administration, or EBSA, at 866-444-3272.

You might also be able to find help from your local consumer watchdog associated with the Pension Rights Center.