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Fraud and Dishonesty


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I have a client that has maintained a 401(k) plan with me for some time. From about 2007, part of the plan's assets, which were all commingled, were invested with a certain investment firm. When my client started the account, he indicated on a preference questionnaire that he wanted the monies to be invested conservatively. It appears that the investment firm ignored his wishes and invested the plan's assets fairly aggressively. Over the last couple of years, my client has been requestng different types of paperwork from me such as, historical brokerage statements, reconciliation worksheets for those assets held by the investment firm, etc. After doing alot of research, my client decided to sue this investment firm. I received a call today from his attorney asking me about the entry on the 5500 forms filed over the years that indicates that there has been no fraud or dishonesty. He wants to know when this box would actually be checked. The opposing side is suggesting that if this box was never checked, then the Plan Sponsor felt there was never any Fraud or Dishonesty, so why is he crying foul now?

Here are my questions:

1. My contention is that you don't check the box indicating fraud and dishonesty because of a "gut feeling" that your plan's assets are not doing as well as you had anticipated and you want to blame it on the investment firm. Correct?

2. Not having received any indication from the plan sponsor other than having me gather historical information and his suspicion that the investment firm might not have followed his instructions, I checked "no" for every 5500 I prepared. Do you agree the correct approach was taken?

3. What would need to occur for that Fraud and Dishonesty box to be checked? Does there have to be something definitive from the courts? A judgement against the injuring party? Is the IRS clear as to what constitutes Fraud and Dishonesty so that the box would be checked with a "yes"? If you know, please direct me to where the IRS says this.

Thanks for the help,


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I agree with you. I believe that the "fraud and dishonesty" losses they are talking about are, in layman's terms, some kind of theft, not failure to follow investment instructions.

Claiming that failure to check that box makes the case invalid is incredibly weak. Not that it's easy to prove that investment instructions weren't followed either.

Ed Snyder

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I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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