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Tough look at 401(k) fraud is under way 300 firms reportedly targets of scrutiny


WASHINGTON -- Citing a sharp rise in pension fraud, Labor Secretary Robert B. Reich yesterday said the department has launched an effort against more than 300 companies that may have illegally raided employee retirement plans.

In announcing the crackdown, Mr. Reich said that since the beginning of this year more than 100 cases involving 401(k) abuses have been closed by the department, resulting in the recovery of more than $3.2 million for about 2,800 workers.

Mr. Reich said he will seek stiff fines and jail sentences for individuals who are defrauding pension programs and will seek reforms to the laws that govern 401(k) plans.

"I want to send a very clear and unambiguous message [to employers]," Mr. Reich said at a news conference yesterday. "Hands off. This is not your money. This money belongs to employees."

The department is investigating 310 companies for possible civil and criminal violations, the secretary said. Sixty-three of the investigations are being headed by the Philadelphia regional office, whose jurisdiction includes Maryland. The office has the largest case load of any of the department's 10 regional offices.

Neither Mr. Reich nor Olena Berg, assistant secretary for Pension and Welfare Benefits Administration, provided an estimate of how much money companies may have stolen from employees.

James S. Riepe, managing director with T. Rowe Price Associates Inc., which manages and services more than 800 401 (k) plans with $16 billion in assets, said that the effort smacks of politics and that the problem is not widespread.

"We have not seen it, we have not run into it," Mr. Riepe said in an interview. "To the extent that the Department of Labor uncovers some fraud, they should aggressively pursue it."

Mr. Reich said employees shouldn't panic because most 401(k) plans are properly managed. But he said problems have been uncovered, especially at smaller companies that have fewer than 100 employees enrolled in a retirement plan. Of the 310 investigations, 166 are focusing on companies that have 100 participants or fewer, he said.

"I am surprised at the extent of problems we are seeing," Mr. Reich said.

A 401(k) plan permits employees to deduct a portion of their pretax income every year, invest it, and pay no taxes on the money until it is withdrawn after retirement. Many companies offer such plans, and they are either run by the company or an outside administrator.

The number of 401(k) plans has skyrocketed as more and more companies have made workers accountable for managing at least part of their own retirement funds. In 1992, the year for which the most recent Labor Department statistics are available, 22 million people invested in 401(k) plans, more than triple the number in 1984. The amount of money held by those plans has exploded to $553 billion, up from $92 billion.

This huge amount of money has tempted some employers to raid plans, Mr. Reich said. Some financially troubled companies simply use employee contributions to pay bills, others use the money like an interest-free loan, and some executives embezzle the money.

Goddard Medical Association of Brockton, Mass., for instance, withheld more than $400,000 of employee retirement money because it was having cash-flow problems, the department said. The money was recovered only after an employee complained that the company was late depositing funds into the plan.

In another case, the department sued New York-based Job Shop Technical Services Inc. last month after the company failed to deposit employee money in the plan. About $2.7 million may have been improperly used, according to the department.

But most cases don't involve fraud or any type of wrongdoing, Mr. Reich said. The department found wrongdoing in 23 of the 116 cases where it recovered money. Often, companies are simply "careless," Ms. Berg added.

To combat the fraud, the department has prepared legislation that would require 401(k) plan administrators to report irregularities immediately to government officials or face a $100,000 fine. The department also wants to cut the amount of time employers have to place employee money into the plans. Currently, employers can hold the money up to 90 days before putting it into the plan, Mr. Reich said.

"You've got to put the money in as soon as possible," he said. "There is very little excuse for waiting that long."

In addition, the department wants every plan to have an independent third-party, who would make sure it is properly managed.

Mr. Reich said employees must keep an eye out for problems, too. They should verify that contributions to the plan are being made by matching the amount deducted from pay stubs with quarterly statements. Employees can also request a form from either the company, or the Labor Department. Known as Form 5500, it provides information on the plan's finances and transactions with outside parties.

The employees should look for warning signs that something is wrong with the plan.

"There is no substitute for employee vigilance," Mr. Reich said. "If you get in early enough, you can get the money back."

How 401(k)s have grown

8.Year ... ... ... Number .... .... .... Assets

.... ..... ..... of plans ... ... ... (billions)

1984 .... ..... 17,303 .... .... .... $92

.... ..... 37,420 .... .... .... 183

.... ..... 68,121 .... .... .... 277

.... ..... 97,614 .... .... .... 385

..... .... 139,704 .... .... ... 553

Source: U.S. Labor Department

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