Who is liable?

[Belgarath]

For you attorneys out there - I was just looking at this, and I wondered - if the Trustee took "reasonable" steps, whatever those might be - to determine that the person requesting the funds was in fact that person, is the Trustee then liable to replace the funds in the Participant's account?

We're so used to thinking of qualified plan funds as inviolate, that I never considered what would happen in a situation like this. Restitution is great, but the thief may not be able to pay restitution.

Release Date: July 7, 2009

Release Number: 09-781-KAN

Contact Name: Rich Kulczewski

Phone Number: 303.844.1302

Former casino employee sentenced for theft of 401(k) plan assets

Kansas City — A former employee of a Kansas City, Mo., gaming casino was sentenced to one year in federal prison and three years of supervised probation after completion of her prison term. Dana Wachter also was ordered to make approximately $38,000 in restitution stolen from a co-worker.

The sentencing was based on a criminal investigation by the U. S. Department of Labor’s Regional Office of the Employee Benefits Security Administration (EBSA) in Kansas City, Missouri and the U.S. Postal Inspection Service.

Dana Wachter was sentenced June 29, 2009 in U. S. District Court for the Western District of Missouri. She was indicted in June 2008 on one count each of aggregated identity theft, mail fraud and theft from an employee benefit covered by the Employee Retirement Income Security Act.

“Theft of employee benefit assets jeopardizes the benefits of workers. This case reaffirms the Labor Department’s commitment to protect workers’ benefits by identifying criminal activity wherever and whenever it occurs,” said Steve Eischen, director of EBSA’s Kansas City Regional Office.

The indictment charged that from November 2006 through July 2007, Wachter, a former table games dealer at a Kansas City casino, stole the identity of a co-worker in furtherance of a number of economic crimes that resulted in actual damages to the victim of over $38,000. The indictment contends that, in March 2007, Wachter used her co-worker's social security and personal identification numbers to authorize an $18,000 distribution from her co-worker’s 401(k) account. Wachter is further alleged to have used the mail to steal a distribution check and forged the participant’s signature on the check.

The criminal case was prosecuted by the U.S. Attorney’s Office for the Western District of Missouri.

U.S. v. Wachter

Criminal No. 4:08-cr-00180-GAF

U.S. Department of Labor news releases are accessible on the Department's Newsroom page. The information in this news release will be made available in alternate format (large print, Braille, audio tape or disc) from the COAST office upon request. Please specify which news release when placing your request at 202.693.7828 or TTY 202.693.7755. The Labor Department is committed to providing America's employers and employees with easy access to understandable information on how to comply with its laws and regulations. For more information, please visit the Department's Compliance Assistance page.

[mming]

Whether or not the trustee accepts responsibility, couldn't the plan's fidelity bond reimburse this amount? I've never seen a plan make a claim on a bond - what would the repercussions be? I imagine any premium increase as a result of the claim would be much less than reimbursing the lost amount outright. Would the trustee's responsibilities be curtailed in any way after a claim?

[K2retire]

Given all of the ID that must be produced in order to start a job, I can't imagine how this employee got away with such a thing.

[Peter Gulia]

Counts one and three alleged in the indictment (to which the accused pleaded guilty) suggest that Danna E. Wachter submitted to a retirement plan’s administrator or its agent what purported to be the claim of another Harrah’s employee, using identifying information of that person.

The indictment doesn’t say or suggest that any of the plan’s administrator, recordkeeper, or trustee did anything wrong. Rather, EBSA’s press release says that the thief “used her co-worker’s social security and personal identification numbers to [claim] an $18,000 distribution from her co-worker’s 401(k) account.”

Sadly, the thief’s sentence is a concurrent imprisonment of only one year, with a fine of $0.

About who bears the loss: It seems unlikely that fidelity-bond insurance should respond to the loss because there is no assertion that a bonded employee of the administrator, trustee, or recordkeeper committed a dishonest act. Fiduciary liability insurance might provide restoration to a plan for a loss alleged to have been caused by a fiduciary’s alleged breach. However, even with some related expenses, a small theft loss often is within an insurance contract’s retention or “deductible”. Much more likely is that the plan trustee and its bank dishonored the negotiation of a check not endorsed or deposited by the payee. This sticks an identity-theft loss with a bank that paid or credited an amount to a person other than the check’s payee. Because banks simply count these routine losses in expenses, all of us share the costs of these crimes.

Although the court’s orders on Wachter’s sentencing include PNC Bank and Bank of America among the restitution payees, they together get only 26% of whatever payments the felon makes. Interest does not accrue on the unpaid restitution amounts. Even if the felon makes payments on the schedule set by the court (and what employer is eager to hire a felon?), she would be about 80 when she makes the last payment on the principal debt (without interest).

[mbozek]

Short anwser- The plan itself as an entity that can be sued under ERISA is liable to the participant for the amount of the loss because a plan representative (or administrator) authorized the payment of the participant's benefits to the wrong person which is no different than if a bank cashes a forged instrument, it is liable to its customer for the loss. In ERISA 101 terms the participant's benefits are nonalienable and nonassignable until paid to the participant or a beneficiary, not until paid to someone who is impersonating the participant. The plan could pursue the thief for any amounts it has to pay to the participant under a claim of unjust enrichment or other equitable remedy.

I would not automatically assume that the plan's trustee and/or its bank are liable for the loss because they will have indemnification provisions in their agreement with the plan to protect them if they rely on instructions received from an authorized representative of the plan. Otherwise they would be liable for every embezzlement of plan funds authorized by the plan. The plan should check its agreement with its financial institutions.

I would expect that this liability would be covered under a fiduciary insurance policy if the plan has one, subject to a deductible.

[jpod]

mbozek: Good points. I agree about the participant still having a claim against the plan, but how exactly would that claim be satisfied in the context of an individual account plan where investments are self-directed? Suppose there is nobody who is liable to the plan, other than the thief, and there is no recovery from the thief, and no fiduciary liability insurance either. Further assume as FGC said that there is no fidelity bond coverage here. Further assume that neither the employer nor anyone else is going to step up and voluntarily make the participant's account whole. Where does the money come from to make the participant's account whole? I really don't have a clue. Making the other participants share in the misery seems logical, but I suspect that the plan document would not support that.

[mbozek]

mbozek: Good points. I agree about the participant still having a claim against the plan, but how exactly would that claim be satisfied in the context of an individual account plan where investments are self-directed? Suppose there is nobody who is liable to the plan, other than the thief, and there is no recovery from the thief, and no fiduciary liability insurance either. Further assume as FGC said that there is no fidelity bond coverage here. Further assume that neither the employer nor anyone else is going to step up and voluntarily make the participant's account whole. Where does the money come from to make the participant's account whole? I really don't have a clue. Making the other participants share in the misery seems logical, but I suspect that the plan document would not support that.

Isnt the plan fiduciary whoever that may be, individual or corporate entity, personally liable under ERISA 409 for the loss to the participant (See LaRue by the Supremes) which leads to the question why would any sane individual ever want to be a fiduciary under ERISA unless there is plenty of fiduciary insurance. It would not be advisable to reduce the account balances of other plan participants to make the loser whole since that would violate the nonalienation provision of ERISA 206(d) for all participants. Best option is for the employer to pony up the loss to make the participant whole to avoid paying the litigation fees of both sides.

[Peter Gulia]

With the typical theft (and yes, these happen regularly), it is often the bank that paid or credited an amount to the thief that takes the loss. If the fraud is detected, the plan trust's payor bank simply dishonors the negotiation of the check. This means that the plan trust isn't missing the money because the check it drew never was collected. Or if a fraud was processed, the payor bank for its customer claims re-crediting. See, for example, UCC 4-111 (three years limitations period to get re-crediting based on an unauthorized indorsement).

In Wachter, the court's sentencing documents named the victims owed restitution. The retirement plan, the plan's fiduciaries, and the recordkeeper were not among them.

Even recognizing how some of the simpler thefts are socialized, any fiduciary should make the plan buy fiduciary liability insurance. If the employer doesn't pay all of the premiums, a would-be fiduciary should refuse to serve unless the employer pays the premium allocable to the non-recourse provision.