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"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 several years.

'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 deduction.'

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 local prosecutors.

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 administrator.

Charles Bell

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 others.

Delores Asiedu

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.

Steve Anderson

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.

David Wedell

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 made.

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.