Same Name - Wrong Guy Got the 401k Money

[Guest Robin S. Vatalaro]

FACTS:

Plan set up by Company X (Company X being the plan sponsor) in the early '90's (PS/401k). In 1999 new TPA inherits the Company X as a client. At that same time a new investment provider/recordkeeper also enters the scene. TPA is independent and not related to the recordkeeper.

Early '90's two gentlemen both by the name of John Doe work for X. Doe #1 hires/fires prior to ever becoming eligible. Doe #2 works for about 5 years and ends up w/ about 30K in PS and 401k money by the time he separates. Both Doe's leave X in 1995.

2001, Doe #1 requests a distribution (via his daughter) from the plan (recall he had no money). Doe #1 has had a massive stroke and is completely incapacitated physically and mentally. Daughter legally has durable POA and signs the recordkeeper's required distribution paperwork, providing a copy of the POA document.

X inadvertently, in 1999, gave Doe #1's address to recordkeeper for statement mailing. So Doe #2's account statements have always gone to Doe #1's house since the change in recordkeeper's in 1999. Thus leading daughter to believe that Doe #1 has 30K in this plan (noone ever thinks to check the soc #'s on the a/c statements). Doe #2 never questions the complete lack of account statements.

Sole role of TPA in assisting with distributions is to verify vesting and make sure J&S is complied w/ if necessary etc etc. Client is not sophisticated enough to know of these legal compliance issues and recordkeeper specifically does not provide these functions.

2001, daughter forwards distribution paperwork to trustee, trustee signs the paperwork and forwards to TPA, who calculates vesting and makes sure legal ducks are in a row. Neither trustee nor TPA is aware that the wrong Doe has requested the funds. Bear in mind both Doe's terminated four years prior to TPA ever becoming involved w/ the plan.

TPA forwards paperwork to recordkeeper to cut the check. On that same date, recordkeeper does the following:

-Changes the social security number on the account. The distribution paperwork reflects the soc # of Doe #1. The recordkeeper's records reflect the soc # of Doe #2, to whom the money really belongs. Recordkeeper happens to be one of the best in the business and is extremely diligent about never making changes, like soc # changes, w/o a trustee/plan sponsor signature. Unfortunately in this situation recordkeeper believes procedures were not followed and cannot pinpoint why they (recordkeeper) changed the soc # on the account, the day of the distribution, from Doe #2's soc # to Doe #1's soc #. Had the soc # differential been questioned, the payout probably would have never happened.

-Cuts the check (participant was taking cash, not rolling) to Doe #1.

Fast forward to 2003. Doe #2 appears out of the woodwork and requests his funds, which of course he is legally entitled to. He is initially informed that he was distributed early 2001. Doe #2 claims he never got a check (also wants the cash, not rolling). After investigation, all of the above facts are uncovered.

QUESTION:

This unfortunate set of circumstances is a true story. Who is liable to the participant and what insurance policies may cover the loss? I realize this is an issue for attorneys to potentially sort out but am curious as to any opinions. Thanks in advance for any help.

[GBurns]

I cetainly hope that this post gets a number of responses from those who know the facts of similar cases. Over the years when I was active in 401(k) and financial planning etc I saw many cases but I have nothing but anecdotal references without facts and am not sure of how the various cases were ever resolved.

Inherent in this post is the warning that even the "best" make horrendous mistakes. I have always wondered how some service providers even came to be regarded as being good much less the "best". Most that I have seen have been terrible yet many would have sworn by them.

There was a recent thread on this Forum regarding the use of someone else's SS# by a plan participant, and in which I pointed out that SS# alone is not and should not be the sole identifier, but there were those who argued otherwise, now here we have this case. There is never any hard and fast rule that will always work, it is supposed that "to err is human" and that mediocrity has become the norm.

The Record Keeper's (they changed what they should not have changed) fiduciary liability will most likely pay.

[mbozek]

Short answer- under ERISA the plan fiduciary is liable to pay Doe no 2 because 30k is his vested accrued benefit under the plan. Fid has a cause of action under state law against both record keeper and tpa for malpractice or breach of warranty of due care for their actions and joint and several liability which will be determined by a ct. (GB-There is no fid liability of vendors because employee's only claim for benefits under ERISA is against fid/plan. doe 2 has no claim against vendors.) Check admin agreements with the parties for the liability provisions - some vendors have limited recovery for mistakes. Since the amount is minimal the parties or their ins carriers will settle but the recovery may take years. The immediate problem is that the fid needs to come up with 30K for Doe 2. If doe 1 or his rep refuse to return the money the fid could pursue Doe no 1 for the 30k in Fed ct. but recovery will be expensive/difficult/lengthy since Doe 1 is incapacitated and had a reasonable basis to believe that the benefits were his. (Note- rep may not be able to voluntarily return money without ct approval which may take time and plan may be asked to pay for ct costs for getting approval.) Also fid will have to front legal fees for recovery effort with no guarantee of repayment. Guardian may need to be appointed by ct to represent Doe 1 which will take time. The fid could leave recovery effort to party who reimburses fid. The fid needs to retain counsel to sort this out and it will be expensive.