Think about how your 401(k) policies and procedures might prevent and discover fraud

This past week, the U.S. Department of Labor issued a press release involving alleged fraud by a key employee that resulted in theft from her company and her company’s 401(k) plan.

According to the DOL’s press release, the controller for a company in Kentucky allegedly created a scheme whereby she issued unauthorized checks made payable to herself and others.  She also used multiple company debit and ATM cards to withdraw cash and pay her own personal expenses, and she made fraudulent payments from the company to an insurance company for the purpose of obtaining and maintaining health insurance for her family.  The controller’s fraud also resulted in a failure to remit 401(k) deferrals into the company’s 401(k) plan totaling $31,882.  The DOL’s press release indicates the controller stole the 401(k) deferrals and fraudulently altered the company’s bank account statements to make it appear that proper remittances were made to the plan.  Her actions led to a total loss to the company of $633,044.

As a result of her bad actions, the controller was recently sentenced by a federal court to 94 months in prison, 36 months of supervised release, and $838,804 in restitution.

Unfortunately, great employers who try to do the right thing and work hard to properly manage their benefit plans can sometimes still nonetheless become the victim of a bad actor.  If someone wants to intentionally violate the law for their own benefit, it can be very difficult to be aware of this and/or to catch them.

Many employers have a 401(k) plan committee that reviews and monitors the plan’s investments on a quarterly basis, as well as other plan administrative matters.  Perhaps your committee might consider adding to its quarterly review some kind of a report or analysis that compares (a) your payroll information showing 401(k) deferrals and plan contributions; with (b) independent information from your recordkeeper that shows deposit information into the plan.  There may be a better idea.  But you might consider thinking about what policies and procedures you could put in place that might prevent, or at the very least quickly discover, fraud impacting your plan.

On a related note, during this audit season we received a number of questions about how quickly 401(k) deferrals should be deposited into a 401(k) plan’s trust.  The answer is:  As soon as possible.  For annual audit purposes, your auditor might tell you that they only consider 401(k) deferrals late if they are deposited beyond five or seven business days after payroll.  This may be the standard your auditor uses for audit purposes, but the DOL will expect 401(k) deferrals to go in much faster:  basically immediately coinciding with or after payroll.  Please do your best to ensure that 401(k) deferrals and loan repayments are deposited into your plan’s trust on the same day as payroll, or maybe – if you have a good documented reason why – a few business days after payroll.  If you have been depositing 401(k) deferrals later than that (e.g., one week after payroll), you should consider putting earnings into your plan to correct this and you should work to improve your process to get your employees’ money into the plan sooner.