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Tuesday, Nov. 28, 1995

For more information call: (202) 219-8211.

Secretary of Labor Robert B. Reich today launched a campaign against pension fraud that includes 10 warning signs workers can use to protect their 401(k) plan contributions from employers who may misuse the money.

The consumer campaign is part of a nationwide anti-fraud program by DOL's Pension and Welfare Benefits Administration (PWBA), which oversees federal laws governing private pensions.

More than 300 companies nationwide are being investigated for potential violations, both civil and criminal. Since the effort began earlier this year, more than 100 other cases have been closed, resulting in the recovery of more than $3.2 million for more than 2,800 workers.

Reich said, "The vast majority of 401(k)s are safe and honest, but we've found that in some cases, employers are taking money from 401(k)s. That's wrong and we want to stop it - that's what this enforcement effort is about. We need consumers' help to track down fraud."

PWBA investigators are working with federal, state and local prosecutors on the cases, Reich said.

The 10 warning signs released by Reich which consumers should use when monitoring their 401(k) plans are:

  1. Your 401(k) statement is consistently late or comes at irregular intervals.
  2. Your 401(k) account balance doesn't appear to be accurate.
  3. Your employer held your contribution for more than 90 days.
  4. A significant drop in your account balance that can't be explained by normal market ups-and-downs.
  5. 401(k) statement shows your contribution from your paychecks wasn't made.
  6. Investments listed in your account balance aren't what you authorized.
  7. Former employees are having trouble getting their benefits paid on time or in correct amounts.
  8. Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees.
  9. Frequent and unexplained changes in investment managers or consultants.
  10. Your employer has recently experienced severe financial difficulty.

"We will aggressively investigate to make sure that money is invested in workers' 401(k) plans, but it is the workers themselves who will be the first line of defense. That's why we're issuing these warning signs - to help workers ask the right questions," said Reich. "The law requires that workers be given statements and information about their 401(k) plans and contributions and they need to be informed so they know what to look for."

Reich suggests that people who have questions about their 401(k) plans, and who are unable to resolve them with their employer or plan administrator, can call PWBA regional offices, or the PWBA national office.

401k Fact:
According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

What Protections Do The Fiduciary Requirements Of ERISA provide?

ERISA protects your plan from mismanagement and misuse of assets through its fiduciary provisions. ERISA defines a fiduciary as anyone who exercises discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so. Plan fiduciaries include, for example, plan trustees, plan administrators, and members of a plan s investment committee.

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.

Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA including their removal.

When Can Your Choose Your Own Investments?

In some defined contribution plans, a group or an individual makes all the investment decisions for the plan's assets. In certain defined contribution plans, however, plan officials may decide to provide a number of investment options, and they may ask you to decide how to invest your account balance by choosing among those investment options.

The Department of Labor has established rules about plans that permit participants to direct their own investments. Under these rules, if, and only if, you truly exercise independent control in making your investment choices, plan officials will be excused from the fiduciary responsibility for the consequences of your investment decisions. A plan under which you in fact exercise independent control over the investment of your individual account is called a 404(c) plan (after 404(c) of ERISA). If you are a participant in a 404(c) plan, you are responsible for the consequences of your investment decisions, and you cannot sue the plan officials for investment losses that result from your decision.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.brokers401k.com

You are entitled to receive a broad range of information about the investment choices available under a 404(c) plan. Thus, a plan that intends to relieve plan officials of fiduciary duties over investments must inform you of that fact. Also, the 404(c) plan must give you sufficient information about investment options under the plan for you to be able to make informed decisions. The information you are entitled to receive without asking includes the following:

  • A description of each investment option, including the investment goals, risk and return characteristics.
  • Information about designated investment managers.
  • An explanation of when and how to make investment instructions and any restrictions on when you can change investments.
  • A statement of the fees that may be charged to your account when you change investment options or buy and sell investments.
  • Information about your shareholder voting rights and the manner in which confidentiality will be provided on how you vote your shares of stock.
  • The name, address, and phone number of the plan fiduciary or other person designated to provide certain additional information on request.


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