IS YOUR 401(K) AT RISK?

By John Greenwald

JAMES WYNN, AN ENGINEER IN WICHITA, Kansas, had been all set to retire to the Philippines with his Filipino-born wife. For the past four years he had set aside 20% of his salary to save $40,000 in his company's 401(k) retirement plan. Or so he thought. Wynn, 63, was unable to cash out and retire this year because all his money had vanished. And his was not the only missing nest egg. Also unaccounted for were the savings of more than 180 of his colleagues at International Technical Services, a firm in Melville, New York, that hires engineers and places them on jobs at companies around the country. Since then the Labor Department has brought a civil complaint accusing Ralph Corace, the former owner of the company, of looting some $3 million from the 401(k) funds. "You can't trust anyone these days," says Wynn. "I feel very betrayed."

That kind of betrayal is becoming widespread. Among the most popular and widely used government-sponsored retirement programs, 401(k) plans are surprisingly vulnerable to corporate fraud. So far, the Labor Department has launched investigations of 310 companies and recovered $3.5 million of plundered assets. While the probes involve a tiny fraction of the nation's 250,000 401(k) plans, they have revealed a disturbing pattern. "We have been surprised at both the number of complaints and the percentage that have been substantiated," Labor Secretary Robert Reich said last week. Investigators have found merit in 401(k) complaints at twice the normal rate for Labor Department inquiries. Often the money has been diverted for the most venal purposes. "Some companies," notes Assistant Labor Secretary Olena Berg, "have been using the money for hunting trips and lavish life-styles" for their officers.

Every payday, 18.5 million Americans have an estimated $747 million withheld from their wages and salaries and placed in 401(k) accounts, where money managers invest it in securities. Taxes remain deferred on the income and investment gains that accrue in the plans until the employees retire. But unlike traditional public and private pension plans, the 401(k) program, which has amassed $525 billion in retirement funds since it began in 1979, carries no federal insurance to protect employees against theft and mismanagement.

Most problems have come at small- and medium-size firms that were tempted to raid 401(k) accounts to meet financial crises. Companies have 90 days from the time they withhold the funds from paychecks until they are supposed to hand the money over to investment managers. But some bosses apparently view the extended grace period as an invitation to dip into the accounts for their own purposes. "There is no end to the creativity of the human mind," says Brian Schaefer, president of 401(k) Ventures, a consulting firm in Palo Alto, California. "This is a hard time in the economy, and people look at that money and say, 'I can borrow it for 90 days and no one will know.'" But that leads to trouble when they can't pay it back.

Some theft is part of a wholesale pattern. At the Y&A Group, a defunct St. Louis, Missouri, engineering firm, former president Malcolm Cheek stole $600,000 through schemes like pledging company assets as collateral for loans that he pocketed. When he later ran into severe cash-flow problems, Cheek ransacked $254,000 from the 401(k) accounts in a last-ditch effort to cover his losses. Convicted last March, he is serving a nine-year prison term for fraud and embezzlement.

Executives have raided health-care programs too. Roger and Sharon Lindsay of Palatine, Illinois, discovered just that last March, on the day before one of their 20-month-old triplets underwent major surgery to correct a defective esophagus. "They put out the deception that everything was fine with the insurance because they kept deducting from our paychecks," says Roger Lindsay, who worked as a salesman for the Regina vacuum-cleaner company, which is under new management. But the previous owners had failed to pay the premiums that were due on Lindsay's medical policy for his last four paychecks, allowing the coverage to lapse.

That forced the frantic father to hunt for insurance even as his son Justin was undergoing the four-hour operation. "There should have been nothing more important than being with my son," Lindsay says, "and I'm on the phone trying to figure out what happened to my insurance and how I'm going to pay for this." He's still not sure. The Lindsays owe $150,000 in medical bills, for which they are suing the Aetna insurance company and the owners who ran Regina. And while Lindsay has found another job, his new health plan doesn't cover existing medical conditions for his children. "This should not happen," Lindsay says. "No executive should have the right to say, 'We're going to play with the company plan because we think we can work our way out of this jam.'"

But employers are not the only ones who can raid worker benefits. Steve Anderson, the president of AlcoTec Wire, a small manufacturer of aluminum wire in northern Michigan, wondered last year why employees who left to join other companies failed to receive their 401(k) settlement checks on time. The trail led to the Honer, Timberlake Pension Services firm. Charles Timberlake, the trustee for AlcoTec's plan, admitted to stealing what turned out to be nearly $365,000 of 401(k) money. "We got the whole tearful confession," Anderson says. "He just targeted our company." Fortunately for AlcoTec, its private insurance covered most of the 401(k) losses. But the capital gains the plan would have accumulated are unrecoverable. As for Timberlake, a pillar of the local business community, he began serving a six-to-ten year term for embezzlement last summer.

To help stem 401(k) thievery, the Labor Department is backing legislation that will require accountants who uncover fraud in a plan to notify federal authorities immediately. Regulations now allow seven months from the discovery until the time reports are due, by which time a troubled company may have declared bankruptcy. The department is also considering whether to shorten the 90-day grace period that firms have to turn over 401(k) funds to investment managers.

Reich says workers should pay close attention to their 401(k) statements and note if they are consistently late or come at irregular intervals. Other possible trouble signs, he observes, range from sharp drops in balances to frequent and unexplained changes in investment managers or consultants. "When employers know that employees are watching," Reich says, "they might refrain from certain temptations."

But vigilance comes too late for embittered workers like Wynn. Says he: "The Federal Government set this up so that a thief could play with my money." For now, his dreams of retirement are on hold. He will have to work several more years before he can afford to retire.

--Reported by John F. Dickerson/Washington, William A. McWhirter/Chicago, Stacy Perman/New York and Joseph R. Szczesny/Detroit

With reporting by JOHN F. DICKERSON/WASHINGTON, WILLIAM A. MCWHIRTER/CHICAGO, STACY PERMAN/NEW YORK AND JOSEPH R. SZCZESNY/DETROIT