Financial Literacy - Securing retirement
10 ways to spot 401(k) abuse

7. Former employees aren't getting benefits on time

If former employees aren't getting benefits on time or in the correct amount, chances are that you'll have a problem sometime down the road, too. You can check if your plan lost money during the year. If it lost money due to criminal activity, it will show up on item 29b on Page 5 of Form 5500. You can also check if a fidelity bond covers the plan's fiduciary. A fidelity bond is a bond that protects plan participants in the event a fiduciary or other responsible person mismanages or misuses plan assets. A fiduciary is someone who handles your money and is supposed to act solely in your best interests. You can also find out how much the bonding company has to pay plan participants if monies are misappropriated.

Tip: If you suspect plan-wide malfeasance or misappropriation of benefits, you should contact the Department of Labor. If you have an individual benefit concern, you should report it to the DOL, but you may also want to consult an attorney well versed in pension law.

8. Employer or plan trustee got a loan from the plan

"One of my clients found out that plan funds were being held for two months before they were transferred," says CFP Robert Timineri, head of Sausalito, Calif.-based Total Return Advisory and Incentive Asset Management. "The company was giving itself short-term loans with client money."

Timineri says the plan provider noticed a usual pattern was broken and began an inquiry.

Tip: Form 5500 can alert you to unusual transactions, such as a loan to your employer, a corporate officer or a plan trustee. Check item 27b and 27c on Page 4 of Form 5500 to see if your plan is having trouble collecting loans owed to it. A separate listing of any defaulted loans or leases should be attached to Form 5500 if this is the case. Again, if you suspect the plan is being misused by plan fiduciaries, contact the nearest EBSA field office.

9. They keep switching the fund firm

Frequent changes in investment managers or plan consultants could indicate that your 401(k) plan is in trouble.

Tip: You can find out if key plan personnel quit or were fired during the year by looking at items 25c, 25d and 25e on Page 4 of Form 5500. You'll also know if there were any questions about their professional judgment.

10. Your company is in dire financial straits

Employers that are having trouble paying bills may be tempted to use retirement plan funds to keep vendors and creditors at bay. The problem is more common at smaller companies without a designated employee to manage the company plan, according to Hotz.

"If the company can't meet payroll or get their vendors paid, there's not always enough money at the end of the month when it comes time to drop a payment into the 401(k) plan," he says. "They ( 401(k) plans) can have a tendency to be the last on the list to be paid and that can be troublesome."

You should always pay attention to any information about your company's financial health. Have there been layoffs recently? Did your employer have to borrow money to keep afloat? These could be warning signs that your company is in trouble.

Tip: If your employer declares bankruptcy, your pension assets should generally be safe because ERISA (massive regulations that govern 401(k) plans) requires pension benefits to be adequately funded and pension monies kept separate from an employer's business assets, according to the Department of Labor's EBSA.

You'll want to contact your plan administrator to find out how the plan will operate during and after your company's bankruptcy. If you can't get information from your plan administrator, call EBSA for assistance.


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