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401K Fraud

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

401k plans are employee-sponsored savings plans that take contributions and invest them. Employers also often match employee contributions to a 401k plan. Money paid into a 401k plan is tax-deferred, meaning that employees do not have to pay taxes until they withdraw the funds. In some cases, employees may be able to make withdrawals without tax penalties if they can demonstrate a financial hardship. 

But investors beware: 401k accounts are often especially ripe for fraud. There are trillions of dollars held in 401k plans, and plan sponsors are not always prepared for a sophisticated cyberattack. They are also vulnerable to investment adviser fraud since rolling over 401k plans to proprietary plans can come with significant commissions for investment advisers.

Do not let your hard-earned retirement savings disappear into a fraudster’s wallet. Make sure your contributions are properly invested and only agree to rollover funds once you are sure a new plan’s benefits outweigh any fees.

Are Losses in 401k Retirement Accounts Normal?

Because 401k plans invest employees’ money in stocks and bonds, it is normal for account balances to occasionally suffer small losses based on normal market fluctuations. In some cases, however, employees have lost money due to their employer’s deception. Employers may commit 401k fraud by taking the money that is supposed to go toward 401k plans and using it for their own purposes.

Certain employers may also offer riskier investments, such as cryptocurrency investments. Make sure you understand the risks associated with your 401k plan and tell your employer if you would prefer more conservative investments.

401K Fraudulently Withdrawn? Employee Complaints

401k accounts are vulnerable to fraudulent withdrawals from both within and outside the company.

  • Employer Embezzlement. There are cases of corporate officers embezzling money from employee 401k plans, although cases of employer theft of 401k plans are rarer than cases of fraud by outside parties.
  • Cybercriminals may access 401k retirement accounts by redirecting payments from the retirement account to an outside bank account. In some cases, sophisticated cybercriminals have compromised 401k accounts through phishing scams and remote account takeovers.

Artificial intelligence can make these frauds seem more convincing. The National Association of Plan Advisers (NAPA) warns that criminals could use AI to re-create an investor’s voice and signature in order to authorize changes to a 401k account. These are increasingly common threats to 401k plans. NAPA advises plan sponsors to have cybercrime insurance to protect employees’ retirement plans.

Signs of 401k Fraud

It is best to occasionally review your 401k account so you can catch the red flags of 401k fraud as soon as possible.

The Department of Labor advises employees to consider taking further action if they note any of the following suspicious signs:

  1. Late account statements, or account statements that arrive at irregular intervals.
  2. Inaccurate account balances.
  3. Seemingly fake 401k statements.
  4. Failure to transmit employee 401k contributions on a timely basis and other paycheck 401k complaints.
  5. Account statements that do not show the employee contribution.
  6. Significant drop in account balances that cannot be explained by normal market fluctuations.
  7. Unauthorized investments on your statement.
  8. Former employees who are having a hard time withdrawing money from their 401k accounts.
  9. Unusual transactions, such as a loan to an officer of the company.
  10. Frequent or unexplained changes to a company’s 401k advisers or consultants.
  11. Severe financial difficulties at your company. Unfortunately, there have been cases where employers take money from 401k plans due to financial difficulties.

What If I Suspect 401k Fraud?

If you notice funds missing from your 401k, reach out for help. In case you suspect your 401k plan has had unauthorized withdrawals by someone outside your firm, you should contact your employer’s HR. Note that if money is stolen from a 401k by someone outside the company, plan sponsors often indicate they will make their employee whole. This reimbursement is not always guaranteed, and it is therefore essential for investors to catch the red flags of 401k fraud as soon as possible.

If you suspect your employer is behind the suspect withdrawals, contact the Department of Labor Employee Benefits Security Administration. You can call 1-866-444-3272 or get in touch via their website.

How to Avoid 401k Fraud

There are precautionary steps that can protect investors from unnecessary 401k losses.

  • Basic Internet Safety: Two-factor authentication can help protect your account from cybercriminals, along with a strong password.
  • Be Aware of Phishing Attempts: Do not provide personal information, like passwords or other identifying information, when prompted by a pop-up ad, an email, or a telephone call from a stranger.
  • Review Account Notifications: Make sure you regularly receive your account statements from your 401k plan. Set up online access so you can more easily check your account.
  • Work with Trustworthy Professionals: Review your broker or investment adviser’s record on FINRA BrokerCheck before agreeing to any 401k rollovers.

401k Conspiracy Theories

If you have seen articles or online videos with titles like “Why 401K is a Scam” or “Is 401K a Ponzi scheme?” you probably have concerns about whether your money is being invested properly. The conspiracy arguments usually boil down to the fact that 401k accounts come with fees, and investors will eventually have to pay the deferred taxes once they start making withdrawals.

  • While both of these assertions are true, the tax-deferred aspect allows money to generate interest before taxes, increasing the interest-generating potential of an employee’s paychecks. By the time an employee enters retirement, they will have entered a lower tax bracket, allowing them to pay less taxes on their 401k withdrawals than they would on income during their working years.
  • As for 401k fees, it is important for employees to inquire about 401k plan fees and to ask their employers for lower-cost plans if they believe their fees are too high. Typically, 401k plans charge 1% to 1.6% in fees. For comparison, managed investment accounts usually charge fees of around 1% of the assets under management.

Be wary of any online investment guru who claims to know the secrets behind 401k scams while touting their own get-rich-quick schemes. Chances are that they simply are looking for an easy way to enrich themselves.

401k Scams and Ponzi Schemes 

401k plans operated by reputable plan sponsors have a low risk of losing money to Ponzi schemes. Solo 401k plans do face a higher likelihood of falling prey to these types of 401k scams. Unlike standard 401k plans, these are self-directed plans. Solo 401k plans rely on the investor’s judgment and could be vulnerable to a pitch from a persuasive conman. This is just one of many examples of investment fraud that solo entrepreneurs should consider when managing their own 401k. 

401K Rollover Regulations

The 401k rollover is often the largest transaction an American ever makes. When an employee retires, they have the option of taking their 401k and rolling it over into a different type of investment vehicle. Employees may also leave their funds invested in the 401k.

Under Regulation Best Interest, advisors must have a reasonable basis for recommending a 401k rollover to an IRA. This rule applies to both Registered Investment Advisers and broker-dealers. Advisers may have a conflict of interest, such as when they recommend an investor roll over their 401k to one of the investment advisory firm’s products. The SEC warns that financial advisors and broker-dealers are not allowed to make recommendations for rollovers based solely on the limited financial products offered by their firm or the limitations of their own licenses. 

Regulation Best Interest also requires financial advisers and broker-dealers to disclose the fee structure of the rollover account. These fee structure disclosures are meant to eliminate surprise losses in retirement accounts.

What Can a Securities Attorney Do for Me?

If you believe your investment adviser or broker-dealer recommended an unsuitable rollover, an investment fraud lawyer may be able to help you recover funds. You have a limited timeframe to file a claim, so do not hesitate to contact Kurta Law for a free case evaluation. Our securities attorneys are experts on securities rules and regulations as well as Regulation Best Interest and 401k rollover requirements. Call (877) 600-0098 or email today.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.