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Preventing Fraud in Your Retirement Plan

The Employee Plans Compliance Unit (EPCU) reviewed Form 5500 series returns that reported fraud loss. We looked at:

  • the circumstances surrounding the fraud loss,
  • how the plan accounted for the loss,
  • what actions were taken to recover the loss, and
  • what actions were taken to prevent future losses from occurring.

Project results

We found a significant percent of plans experienced fraud losses for two main reasons:

  • weak internal controls
  • risky investments

Prevention

Internal controls are business processes designed to detect and prevent mistakes and fraud in the operation of your retirement plan. It’s important that you establish administrative procedures to segregate plan duties and safeguard assets, especially in a small business environment when there are fewer employees to perform these tasks.

Strong internal controls are important for any size business or retirement plan. Good internal controls will help you:

  • protect assets from accidental loss or loss from fraud,
  • ensure the reliability and integrity of financial information,
  • ensure compliance with various laws and regulations,
  • promote efficient and effective operations, and
  • accomplish the plan’s goals and objectives.

Some helpful internal control steps you can take are:

  • Ensure the plan’s books and records are checked regularly by an outside third party
  • Trace deposits and payments to original documents
  • Have someone else review work when only one employee is in charge of plan operations
  • Ensure your fidelity bond is current and in a sufficient amount
  • Keep blank checks locked up
  • Have outside professionals verify transactions
  • Ensure any loans to third parties are in writing with all forms properly completed, adequately secured, and all interest payments made on time
  • Reconcile bank, investment and account statements regularly
  • Require two original signatures on checks or forms that involve plan assets
  • Keep copies of plan documents including Form 5500 series returns and determination letters
  • Ensure that payments are sent to correct vendors
  • Request product and service providers promptly remove employees or trustees with signature authority after they retire or leave employment
  • Verify participants who are supposed to receive loans or other distributions actually received them in the correct amounts

Regarding risky investments, the old maxim still applies. If it sounds too good to be true, it probably is. One of the purposes of a retirement plan is to accumulate money for when you retire. Investment returns of 35 – 40% are unlikely and may be indications of a Ponzi type pyramid scheme or other type of questionable scheme.

Risky investments may also expose you and your plan to additional taxes on prohibited transactions or unrelated business income.

Some steps you can take to avoid getting involved in a risky investment are:

  • Be prudent in your investments
  • Question investments in hard-to-value assets including hedge funds and foreign assets
  • Ensure that your investment advisors act according to your instructions and monitor their work regularly
  • Consult with your benefits professional to ensure that you have administrative procedures in place to prevent fraud or dishonesty in your retirement plan.

What we’ve done

In some cases, we found there was no actual fraud. Instead, we learned:

  • sponsors incorrectly entered fidelity bond information on the fraud line –
    • we’re looking at ways to educate filers on how to complete their return, specifically the fidelity bond and fraud questions because they’re listed consecutively on the return:
      • Was this plan covered by a fidelity bond?
      • Did the plan have a loss, whether or not reimbursed by the plan’s fidelity bond that was caused by fraud or dishonesty?
  • IRS or sponsor systemic errors incorrectly reported a fraud loss -
    • we corrected the software conversion error occurring in EFAST2.

Planning tips

If you prepare the Form 5500 series return yourself, review it carefully to ensure that you didn’t confuse the fidelity bond amount with a fraud or dishonesty loss. You must report the loss whether the plan recovered the loss through the fidelity bond or otherwise.

When a third party prepares your return, take time to review it and match your answers to the form’s questions. The EPCU uses information on your Form 5500 series return to select project cases. Putting incorrect information on your return, or leaving something blank when there should be an entry, increases the likelihood that we may select you for an EPCU compliance check that you might’ve avoided.

Correction

If you find errors on the information reported on your return, fix these errors promptly by amending the return. If you find errors in your plan’s form or operation, fix them using our Employee Plans Compliance Resolution System (EPCRS).

Contact us

If you have questions about the Fraud project, email us and include “Fraud” in the subject line. Make sure to include your phone number and the best time to reach you, and we’ll contact you with answers. We regret that we cannot respond to technical questions unrelated to EP compliance checks.

Additional resources

We have many resources to help you keep your retirement plan in compliance. Our resources can help you find and fix errors and avoid making them in the future.

Page Last Reviewed or Updated: 18-Nov-2016