"Who's Been Eating My Nest Egg?"
By: David Cay Johnston
The New York Times, November 26, 1996
Every payday, about 18.5 million Americans take home a check shrunken
not just by taxes, but also by an amount they have designated for their
401(k) retirement account. But not all of the $747 million in 401(k) savings
withheld from paychecks each week is invested. Sometimes the boss steals it.
The Labor Department says it is investigating 416 complaints by workers
about the apparent theft of job-benefit funds, from health-insurance
premiums and pension payments to 401(k) savings. More than 300 involve
401(k) money that was withheld from paychecks but never turned over to a
mutual fund or other investment manager.
Last month, in the biggest case so far, the Labor Department
sued Ralph Corace of Coram, L.I., accusing him of stealing $2.7 million from
the 401(k) plan at his aerospace engineering company, International
Technical Services. 'This problem is something most workers never worry
about,' said Labor Secretary Robert B. Reich, whose department has oversight
over nearly all retirement plans, including 401(k)'s, similar accounts
called 403(b)'s used by nonprofit groups, profit-sharing plans and
traditional plans. 'But every indication is that it has been growing for
'It should not be surprising that some employers, feeling
squeezed, may delay making a payment into a 401(k) plan or may stop making
payments' and use the money to pay bills, Mr. Reich added. Unless business
improves quickly, he said, they are often unable to come up with the funds,
and their trips to the till 'quickly turn into full blown frauds.'
Employees are usually stunned to discover how vulnerable
their money is. Many assume it is protected by the Federal Government
against theft or fraudulent mismanagement -- as traditional pension funds
are, up to $30,886 annually. The Federal safety net for traditional plans,
created 20 years ago, also requires companies to set aside money as time
goes by for pensions rather than putting off that expense for later years.
Traditional pension plans, which pay pre-established benefits to retired
workers, have been around for decades. The 401(k) accounts, which accumulate
contributions by workers and, often, matching funds by their employers, are
only 13 years old. And though they have exploded to $500 billion in assets,
Congress has yet to write guarantees to make sure that money withheld from
paychecks, and matching contributions, gets safely to the investment vendor.
'Whoever thought your 401(k) money could be stolen?' asked
Charles Bell, 35, a Texas aerospace engineer who lost not only the money he
had withheld when he worked for International Technical Services, but also
his 401(k) savings from a previous job that he transferred to the
International Technical plan. 'I never gave it a moment's thought or worry,'
said Mr. Bell, who is out $26,000. 'Congress needs to fix this.' Mr. Reich
believes that many workers, like Mr. Bell, have never thought about the
issue. Their money, after all, has been parked in an obscure corner of the
financial system and is unavailable for the day-to-day living expenses that
preoccupy them much of the time. Indeed, the Labor Secretary estimates that
the cases reported to his agency represent only a fraction of the total.
For cash-starved companies, the temptation to help
themselves to workers' money can be overwhelming: they run an almost zero
risk of prosecution if they keep it for less than 90 days. While Federal law
requires that 401(k) proceeds be 'segregated from the general assets' of the
employer as soon as practical, the fine for temporarily diverting the money
for less than 90 days is only $25 a day -- and has almost never been
imposed. David Wedell, a former executive at a St. Louis engineering company
who lost $2,500 when the chief executive embezzled $254,000 of 401(k) money,
wants Congress to overhaul the system. He argues that lawmakers should
either require that 401(k) money be turned over to investment managers
immediately, for example, by electronic transfer, or else they should
'eliminate the 401(k) system and let people save on their own with the tax
Mr. Reich said that as growing numbers of Americans go to
work for small companies, the misappropriation of 401(k) money will become
more common and the Government will find it harder to police misconduct.
Pension-fund specialists say big companies are easier to police, less likely
to dip into workers' funds and more likely to be able to replace the money
if they do. Indeed, investigators for the Labor Department's Pension and
Welfare Benefits Administration say most such theft involves employers with
fewer than 100 workers and that the Justice Department often considers the
cases too small to pursue. As a result, the Labor Department often turns to
In Fond du Lac, Wis., for example, an employee of an
environmental cleanup concern told the Labor Department that he suspected
the owner, Michael L. Fuhrman, was diverting 401(k) funds. Department
investigators said they had confirmed the employee's fears and warned Mr.
Fuhrman to stop. When he persisted, they said, they turned the case over to
the county prosecutor, who charged Mr. Fuhrman with stealing $13,484. Mr.
Fuhrman has pleaded not guilty; no trial date has been set.
Mr. Fuhrman did not respond to messages on his answering
machine requesting an interview, and his lawyer was unavailable for comment.
Two other Wisconsin cases, involving fewer than two dozen workers each, are
also being pressed by local prosecutors who are relying on Labor Department
investigators. What follow are the stories of four workers whose 401(k)
funds were raided -- three by their bosses and the fourth by the plan
International Technical Services seemed like a thriving
operation when Charles Bell joined it in 1992 as a reliability engineer.
More than 750 people worked for the Long Island company, designing parts for
jet fighters and military helicopters in at least 22 states. Mr. Bell
analyzed the dependability of their designs.
For Mr. Bell, rolling over the $11,000 he had accumulated in
his former employer's 401(k) plan into a new account at International
Technical was just more paperwork. As the weeks rolled by, the haphazardness
of the notifications he received of his account balances seemed little more
than an annoyance. Then, he became suspicious. 'I couldn't get statements on
time,' Mr. Bell recalled. 'Each Friday, when the guy came out to bring our
checks, I would ask, 'Where's the statements?' '
He said he was given the name of a company official at the
head office, and she told him she had no record of any 401(k) money for him,
including the $11,000 rollover. After he pressed her, he said, she told him
that a check had been found and was deposited in his account. 'But then the
quarterly statements did not come on time,' Mr. Bell said. So he called the
official again. First, the company official told him that CEP Consultants, a
Melville, L.I., company, had erred in preparing the records. Then, he said,
she blamed the printers, then a problem with this document or that.
A lawyer for Ralph Corace, the owner of International
Technical, declined to comment, and a lawyer for CEP said it had done
nothing wrong. Tired of complaining, Mr. Bell said he stopped the deductions
from his checks and asked International Technical to return his money. 'They
said you can't get your money out until you leave,' Mr. Bell said. So he
found another job. Again, he called International Technical Services' head
office. 'I said I would like to roll my money over to my new employer's
401(k) plan. I wastold, 'Unfortunately you cannot do that because it's all
tied up in court.' '
Mr. Bell said he considered himself lucky. He is 35 and has
time to start saving again. But one colleague, an engineer in his 50's, lost
more than $100,000, he said. 'I feel like I have been taken advantage of not
just by Corace and all those who helped him,' Mr. Bell said, 'but by the
Government, which makes it easy to steal your money.' In addition to the
Labor Department suit that accuses Mr. Corace of stealing $2.7 million, a
lawyer, Michael Tryon of Garden City, L.I., has filed a lawsuit seeking
restoration of nearly $3 million in unaccounted for 401(k) money on behalf
of nearly 200 workers against Mr. Corace, International Technical, CEP and
Five Star Industries in West Chester, Pa., a Philadelphia
suburb, was known for paying very good wages to the workers who designed,
manufactured and installed pressure tanks used in petrochemical processing.
And it was a fast-growing company, nearly doubling in size to about 200
workers in just a few years. Delores Asiedu, 60, of Wilmington, Del., said
she had 10 percent of her pay for her design work withheld for her 401(k)
plan, and the company put in an additional 3 percent. But then the 401(k)
statements stopped coming in 1991.
'About 1991, our supervisors came around and said, 'Please
don't withdraw your 401(k) money,' ' Mrs. Asiedu said. Still, she was not
worried. 'I thought that once it was withheld from your check, it was beyond
the boss's reach,' she said. 'Now the money is gone.' Bob Bird, an engineer,
said that when he realized that his 401(k) money was being diverted, he went
to the Philadelphia office of the Labor Department's Pension and Welfare
Benefits Administration. But, he says, he got a lukewarm reception from
agency officials. 'They had no interest in standing beside the employees,'
he said. 'They told us to file individual lawsuits, which is ridiculous
because the cost of hiring a lawyer for many people is more than what they
have in their 401(k)'s.'
That was before Mr. Reich took office. Since he was
appointed, the Labor Department has trained 50 people to take complaints
about 401(k) irregularities and is aggressively pursuing theft cases. The
department ultimately joined in a criminal case against Five Star's owners,
Joseph Messner, 40, and his brother Christopher, 38. Both men pleaded guilty
to bank fraud and embezzling and are serving two-year terms in Federal
prison. Their company went out of business.
Arthur Donato Jr., Chris Messner's lawyer, said: 'Embezzling
is sort of a misnomer. It's not like they reached into the plan and took
money out. They used the money to keep the business going so people kept
their jobs a little longer.' But Mrs. Asiedu and three other workers take a
less sympathetic view. They, as well as Labor Department investigators, say
that in the years that $294,000 disappeared, the two brothers rented luxury
cars, remodeled a home and paid themselves six-figure salaries. Mr. Donato
denied that his clients had used the 401(k) money to live extravagantly.
Alcotec Wire, a maker of welding wire in Traverse City,
Mich., farmed out the administration of its 401(k) plan to Charles W.
Timberlake, part owner of a local firm, Honer Timberlake Pension Services.
But like most business owners, Steve Anderson, Alcotec's president, made
himself the trustee of the plan, giving him responsibility for following
regulations and keeping the money safe. In time, though, Mr. Anderson began
to worry that his company might become the target of lawsuits by workers
dissatisfied with the performance of their investments. So he asked Mr.
Timberlake to assume the trustee's role.
There didn't seem to be any cause for concern: Honer
Timberlake handled the record keeping for 100 retirement plans, and was a
respected member of the community. As trustee, he became the sole
intermediary for all correspondence from the investment manager. That
enabled him to divert money from the plan, which covered 80 workers, and
hide the theft by intercepting the manager's reports and sending his own
fakes to the workers. Suspicions aroused, Mr. Anderson went to the local
police and to the Labor Department office in Cincinnati. Their
investigations led to charges of embezzlement against Mr. Timberlake, who
pleaded guilty and was sentenced to 10 years in prison in January. The
firm's founder, William Honer, who was not implicated in the case, has since
removed Mr. Timberlake and renamed his company.
'His business just didn't generate the income he expected,
so he took the money,' said Alan Schneider, the assistant county prosecutor.
Mr. Timberlake's lawyer, Craig Elhart, said his client had been motivated by
need, not greed. 'He used the 401(k) money over a three-year period to
support the cash flow of his own business,' Mr. Elhart said. Mr. Anderson
said he delivered the bad news to his workers on the shop floor and promised
to try to cushion the blow -- though he warned them he might not be able to
make up all their losses. Since then, he added, a fidelity bond held by one
of the company's investors has paid out $388,000, covering all of the
losses. (A fidelity bond is a form of insurance against white-collar theft.)
And Mr. Anderson has resumed his role as trustee.
The 125 workers at the Y & A Group, electric-utility
engineers in St. Louis, thought a fidelity bond would reimburse them after
the company's chief executive embezzled $254,000 from their 401(k). The
chief executive, Malcolm Cheek, disappeared in 1991, leaving behind $7
million in company debts.
The employees went to Shearson Lehman, the investment firm
that handled the Y & A plan, and asked for the money that had been
deposited in their 401(k) accounts. Shearson refused, according to Mr.
Wedell, who was president of the company's international subsidiary. Indeed,
Shearson -- which has since been acquired by Smith Barney -- retained two
law firms to investigate its liability for funds withheld from paychecks but
not deposited with Shearson; the brokerage firm concluded it had no
liability. It then deducted about $12,000 in legal fees from the money the
former Y & A employees had in their individual 401(k) accounts.
A Smith Barney spokesman, Bob Connor, said he could not
explain why Shearson Lehman charged the legal fees. Mr. Wedell said the
charges came to 10 percent of his account balance. When Mr. Wedell and
others finally got most of their 401(k) money back from Shearson, they
learned from the brokerage that there was a fidelity bond issued by a unit
of the St. Paul Companies, a big underwriter, but that no payment could be
made on money withheld from paychecks but not deposited with Shearson. That
was because Mr. Cheek had merely disappeared and had not been convicted. A
spokeswoman for St. Paul, Kim O'Connell, said the proof-of-loss requirements
had not been met initially and no subsequent claim for payment has been
Then in 1994, Mr. Cheek was arrested in South Carolina along
with his wife, Stephanie. Both pleaded guilty to conspiracy and
theft-related charges and are now in prison -- Mr. Cheek for nine years;
Mrs. Cheek for three. Mr. Wedell said he and others again tried to collect
on the fidelity bond, believing that the conviction requirement had been
met, but ran into a new problem. 'Shearson Lehman had been acquired by Smith
Barney, so we went to Smith Barney's vice president for customer relations
to ask them to move on the fidelity bond, and we got nothing,' Mr. Wedell
said. 'No letters, no return telephone calls, no response.' Mr. Connor
confirmed that Smith Barney has not filed a claim on the fidelity bond since
the convictions. But he said he believed that the Labor Department might
make such a claim on behalf of the workers.
Mr. Wedell said the experience had convinced him that there
were serious flaws in the 401(k) law that needed immediate attention from
Congress and the White House. Meanwhile, Mr. Wedell has spoken with many
friends and colleagues about the issue and encouraged them to look into
whether their 401(k) money is being quickly put on deposit with a mutual
fund or other investment manager. 'Other people I know are finding out that
their money isn't being turned over,' he said. 'What I've learned is scary.'
Safeguarding Your 401(k) Money
Federal law requires that 401(k) contributions and matching
funds be turned over to an investment manager as soon as practical, and no
later than 90 days after the contributions are withheld from a paycheck. To
make sure your savings aren't being diverted, Labor Secretary Robert Reich
recommends these precautions:
Compare your pay stub with the contributions reported to
your 401(k) mutual fund or other investment manager to make sure the amounts
match. Make sure any company contribution or match was made to your
investment account. If in doubt, call your mutual fund, insurance company or
other investment manager and ask for the date and amount of the last
contribution to your account. If your investment statement comes from your
employer, rather than directly by mail from the investment manager, check
the statement by calling the investment manager. Ask colleagues who have
left your company if they had difficulty having their 401(k) funds rolled
over or released to them. Be wary if your employer drops an outside payroll
service, which usually requires depositing money for gross payroll, and
switches to issuing checks internally, which may indicate money withheld
from paychecks is not being sent on to your 401(k) account.