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Sharp-Eyed Employees Key to Spotting 401(k) Problems

The Labor Department says it doesn't have enough investigators to do random audits.

Who polices your 401(k) plan?

You do.

And if you're not paying attention, you could be in for a nasty surprise.

Last year, the

Labor Department

settled a lawsuit alleging that Nashville, Tenn.-based

Resource Consultants

misused an estimated $291,000 from the company's 401(k) plan to cover operating expenses and meet the payroll.

The financially strapped environmental-consulting firm was also cited by the department for making $69,000 in loans from 401(k) assets to the company's president and the plan's administrator that were not repaid.

In another case pursued by the Labor Department,

tg Bauer Associates

, a Falls Church, Va.-based government contractor, was ordered to repay $161,279 in employee contributions that the department says were deducted from employee paychecks and used for general operations instead of being immediately forwarded to the firm's 401(k) plan.

These are not isolated incidents. In fact, the Labor Department has recovered more than $49 million in misused 401(k) funds in more than 1,000 cases brought against firms since it began a national enforcement project in October 1995. What's disturbing is that many of these problems would have gone unnoticed if not for sharp-eyed employees because the understaffed government agency can't go out on its own to look for trouble.

"A well-informed participant who pays close attention is really the first line of defense," says Virginia Smith, director of enforcement in the Labor Department's Pension and Welfare Benefits Administration agency -- the office responsible for regulation of 401(k) plans.

In addition to overseeing the more than $1 trillion invested in 401(k) plans, the PWBA also is responsible for the $2.5 trillion that remains in older, more traditional defined-benefits plans in which pension benefits are provided primarily by the employer.

"We only have between 300 and 400 investigators nationwide," says Smith, "With over $3.5 trillion in 700,000 plans, we don't have the resources to do random audits."

That leaves plan participants playing the role of 401(k) cop.

Where to Look

While Smith doesn't rule out the possibility of problems cropping up in any size company, "most of the problems

we see involve small or medium-sized companies where the plan trustee is also the owner of the company," she says.

That's not surprising, since small companies greatly outnumber bigger firms. For example, companies with 50 to 100 employees accounted for 34,000 401(k) plans at the end of 1997, according to

Spectrem Group

, a San Francisco-based financial consulting and research firm. That compares to only 1,400 plans for companies with 5,000 employees or more.

Resource Consultants' plan, for example, was one of the small ones. It covered 129 participants and had assets of $1.1 million at the end of 1994, according to the Labor Department. The company filed for bankruptcy reorganization in 1996, and the 401(k) plan was expected to receive full restitution for the losses under the bankruptcy proceeding, according to the department. Company officials could not be reached for comment.

What to Look For

Smith believes that the majority of 401(k) plans are run well. But as the more than 40,000 workers for whom the Labor Department has recovered 401(k) assets know, there are exceptions. While the agency responds to a variety of complaints made by participants, Smith says the most commonly reported problem is when "money is deducted from a participant's pay and not put in the plan in a timely manner."

For a 401(k) contribution, "timely manner" means within 15 days of the end of the month in which the employee's contribution was deducted from the paycheck. "That's the outside limit," says Smith of what the PWBA calls the "15-day rule." Ideally, Smith says, "the money is supposed to be put into the plan account as soon as it

can be segregated from paychecks, and that's a lot quicker than the 15-day rule mandates."

In the case of tg Bauer, the company was, at one point, almost one year behind in remitting employee contributions to the plan, according to the Labor Department. The company later filed for bankruptcy, as did its owner, Thomas G. Bauer. As part of the settlement, Bauer and the plan's administrator were ordered to make periodic repayments to the plan, which had $855,710 in assets and 125 participants as of 1993. Bauer also was ordered to pay a civil penalty. He could not be reached for comment.

The reasons that employers withhold contributions range from "sloppy bookkeeping" to cash-strapped small employers "effectively using the contributions as a loan to keep the cash flow going," says Smith. "The worst-case scenario," she says, "is where an employer simply steals the money he deducts from the employees' pay and walks away." But the enforcement director says cases like these are "few and far between."

To keep investors alert to potential problems with their 401(k) plans, the Labor Department has published a number of pamphlets explaining their rights. Some are available on the department's

Web site. The department also offers a list of warning signs for 401(k) participants to look out for.

Participants in 401(k) plans need to scrutinize their individual account statements, says Smith. If a potential problem is spotted, an employee should first question the 401(k) plan administrator. But if questions go unanswered, Smith suggests contacting a local PWBA field office to file a complaint. The PWBA Web site lists

field office locations.

We'll be watching too. Send any questions you have about your company's 401(k) plan to, and include your full name and enough information for us to check it out.