August 25, 2016

Red Flags – Benefit Plan Fraud

See Also >>> 401k Plan Audits

Fraud is an area that most business owners and executives don’t think about until something bad happens. What’s worse is by the time the misfortune has been discovered, the damage has already been inflicted. Unfortunately, people are not always as honest as we would hope. While most business owners commonly think of fraud in the framework of the company, there is another avenue of fraud that must also be considered – the company’s employee benefit plan administration. A plan sponsor (generally the employer or company) needs to be aware there is a possibility of fraud occurring with plan administration. For this reason, it’s important to understand the warning signs, or red flags, that something inappropriate is occurring. To help clients, prospects and others understand the red flags and how to protect participants; Wilson Lewis has provided the following information.

Common Warning Signs of Plan Fraud 

• Account Statements – Often when fraud or other illegal behavior is occurring, account statements are not sent to participants on a regular schedule. In fact, it’s quite common for the statements to arrive at irregular times or not at all. Be aware of sudden or unexpected changes that happen without cause.
• Account Balance Changes – Another sign of wrongful activity is a participant’s account balance may seem inaccurate or experience fluctuations beyond what would be expected in real time market conditions. Unexpected changes in these balances are a sure sign that investigation is needed. While it’s possible a clerical or reporting error was made, a continued pattern of inconsistency in account balances will reveal that it’s more than just a onetime error.
• Inaccurate Investments – Sometimes when improper behavior is occurring participants will notice that their plan investments change or are simply inaccurate. When fraud is occurring, it’s common for participant money to be placed in unauthorized investments. As a result, it’s essential to ensure that investment selection choices are confirmed with participants.
• Unusual Transactions – A telltale sign of fraud is when unusual or unexpected transactions start to happen. Unrequested loans to the employer, participants, or to the plan trustee are certainly signs of fraud, not to mention a poor plan and internal controls.
• Benefit Payout – Over time when fraud is prevalent in a plan it becomes more and more difficult for existing and former employees to have their benefits paid. A variation of this scenario is when a benefit is paid but for the wrong amount. Consistency is key. If a wrongful payout is a one-time occurrence it’s most likely an error, but if it’s a consistent issue, it’s apparent something more serious is happening.

Maintaining Oversight

Most companies today outsource plan administration tasks to various organizations such as third party administrators (TPAs), payroll providers, etc. These companies generally perform routine tasks and their interaction with the plan sponsor is often limited throughout the year unless a specific issue or question is raised. Given the nature of the relationship and level of communication, it’s important for the plan sponsor to properly monitor service providers as well as the actions of internal employees. This will ensure that the opportunity for fraud is limited as much as possible.

Contact Us

Fraud is never welcome especially when it concerns a person’s long term and/or retirement savings. While no one can ever be fully prepared for such situations, it’s important for a plan sponsor (employer) to take reasonable steps to ensure proper safeguards are in place. If your company would like to discuss such plan safeguards or is interested in switching benefit plan auditors, Wilson Lewis wants to help! For additional information please contact us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.