Many Americans use an employer-sponsored 401(k) plan as their most important retirement savings tool. For employees, 401(k)s are an easy way to save and invest for retirement while getting tax advantages. For unscrupulous managers, however, they present an opportunity for fraud. 

Though 401(k) plans are regulated by federal law, fraud can still occur when companies misuse the funds. These transgressions can range from simple mistakes to outright theft.

In this article, we’ll look at how employers can misuse your 401(k) funds, the laws regulating the use of the funds, and how you can identify and report suspicious activity.

Understanding 401(k) Fraud

The company you work for does not own the money you’ve invested in your 401(k) plan, including the contributions from your employer. Even if your employer goes bankrupt, they cannot claim your 401(k) funds.

In 2021, 401(k) plans in the U.S. held more than $7.3 trillion. Employers must follow regulations regarding on how they can use the funds held in a 401(k). For example, the Employee Retirement Income Security Act (ERISA) of 1974 states that employers who offer qualified retirement plans, including 401(k) plans, must ensure that plan fiduciaries do not misuse plan assets.

ERISA requires that the administrators of 401(k) plans must regularly inform participants about their features and funding. It sets minimum standards for participation, vesting, benefit accrual, and funding. It also grants retirement plan participants the right to sue for benefits and breaches of fiduciary duty. ERISA is enforced by the Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL).

A dishonest employer or broker stealing funds from a 401(k) plan would be in breach of ERISA and other laws as well. They could be guilty of embezzlement, which is criminalized by Title 18 U.S.C. §664 and is sanctionable by fine, imprisonment for up to five years, or both.

Despite these laws and enforcement, 401(k) fraud still occurs. In the financial year 2021, EBSA closed more than 1,000 investigations into potential 401(k) fraud. Among them, 741 of these cases resulted in money being recovered for plan participants or other corrective actions. In total, EBSA managed to recover over $2.4 billion for 401(k) plans, their participants, and beneficiaries.

Identifying 401(k) Fraud

It can be difficult to know when an employer misusing funds in a 401(k) plan. However, employers must provide annual statements to plan participants. Reviewing these statements can help you spot potential fraud. 

Here are several warning signs:

• Late statements: Statements that arrive infrequently or irregularly can signal fraud.
• Inaccurate balances: If your balance is lower (or higher) than you’d expect, determine why.
• No paycheck contributions: Ensure none of the contributions being made from your paycheck are missing from your total contributions. 
• Unauthorized investments: Look for any investments on your statement that you didn’t authorize. 
• Issues for former employees: Take notice if former employees have trouble getting their benefits paid on time or in the correct amounts. 
• Unusual transactions: Look for transactions like loans to your employer, corporate offices, or plan trustees. These types of transactions should not occur from your account. 
• Employer financial challenges: An employer with recent financial difficulties could be more tempted to steal from your 401(k).

The Bottom Line

Workplace 401(k) plans are controlled by several pieces of federal legislation and enforced by the Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL). Despite this, 401(k) fraud still occurs. If you suspect that your employer is stealing funds from your 401(k) plans, you should report these suspicions to EBSA or the IRS, which may conduct an investigation and perhaps recoup any lost funds.