Fraud is a fundamental problem that businesses must protect themselves against.
When an incident of fraud is uncovered not only does it destroy trust between management and employees, it can also end up costing the business tens to hundreds of thousands of dollars. Therefore, most companies have implemented a robust series of internal controls and other measures to prevent fraud as much as possible. While most are aware of the need to protect their company, they often don’t realize similar measures should be taken to protect their company’s benefit plan. This is often because there is a perception of safety since so many vendors are involved in plan administration. Unfortunately, this is a false sense of security because the more vendors involved means the opportunity for fraud. To help clients, prospects and others understand the preventative steps they can take, Hanson & Co has provided a summary below.
Common Plan Fraud Opportunities
Hardship Distributions – While this is a nice plan feature designed to give participants a parachute during a rough patch in life, it’s also an excellent opportunity for a fraudster to steal from the plan. Supporting documentation such as medical bills, tuition bills and other items which are needed for distributions can be easily falsified. It’s important for the plan to have a method for validating the authenticity of such documents.
Terminated Employees – Terminated employee accounts are fertile ground for fraud especially when distributions and payments have not been taken out of the plan and there is zero account activity. This situation is conducive to fraud because it provides the chance to direct payments of distributions to non-legitimate places.
Diverted Contributions – This is “ripe picking” for a fraudster because they can take participant contributions and divert them to personal or other accounts. It can take some time for the details to emerge allowing the fraudster the opportunity to cover their tracks.
Contribution Failures – Any individual involved in the management or handling of employee/employer contributions can easily move funds to personal accounts. When this occurs it’s generally perpetrated by those who handle payroll or individuals involved in plan administration. Again, this type of fraud takes time to uncover thereby providing the criminal time to cover the fraudulent activity.
Fraud Prevention Steps
The good news is that plan sponsors are not helpless in their efforts to keep their plan, its participants and assets free from fraud. A few steps which should be considered include:
Requiring key parties to sign conflict of interest statements,
The implementation of a whistleblower policy,
Ensure proper segregation of duties, and
Perform periodic audits of participant contributions and distributions to ensure there are no discrepancies.
It’s unfortunate that companies must be concerned about fraud in their retirement plan, but it’s an essential risk management step that should be taken. If you have questions about fraud prevention strategies or would like assistance with your retirement plan audit, Hanson & Co can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.