Legalized 401(k) Fraud

There are a litany of laws protecting participants from fraud that have helped victims recover their money, but these laws only deal with theft. Fraud can still occur in the absence of outright theft in the form of mere misappropriation of assets, which is a form of embezzlement, defined by the Cornell Law School Legal Information Institute as:

“The fraudulent taking of personal property by someone to whom it was entrusted. It is most often associated with the misappropriation of money. Embezzlement can occur regardless of whether the defendant keeps the personal property or transfers it to a third party“.

And it defines misappropriation as follows:

“(1) Obtaining or exercising unlawful possession over the property of another with the purpose to deprive the owner of the property.

(2) Obtaining property or services offered for sale or compensation without making payment or offering to pay.

(3) Obtaining property or services offered for sale or compensation by means of deception or a statement of past, present or future fact that is instrumental in causing the wrongful transfer of property or services, or using stolen, forged, expired, revoked or fraudulently obtained credit cards or paying with negotiable paper on which payment is refused.

(4) Concealing unpurchased merchandise on or about the person without the knowledge or consent of the seller or paying less than purchase price by deception.

(5) Acquiring or possessing the property of another, with knowledge or reason to believe that the property is stolen.”

#3 applies to the obtaining of services for compensation paid by participants that are not commensurate with the level of services provided. For example, I have documented many instances where financial advisors receive significant and increasing annual compensation despite not providing any services at all and where plan sponsors pay record keepers and administrators increasing annual compensation without making an effort to negotiate or thoroughly compare their services to other comparable providers. These actions demonstrate a failure to meet the reasonable person standard:

“The so-called reasonable person in the law of negligence focuses on how a typical person, with ordinary prudence, would act in certain circumstances. The test as to whether an individual has acted as a reasonable person is an objective one, and so it doesn’t take into account the specific abilities of a defendant. Thus, even a person who has low intelligence or is chronically careless is held to the same standard as a more careful person or a person of higher intelligence.”

Unfortunately, this type of financial abuse primarily occurs in smaller plans that the Department of Labor lacks the resources to focus on and litigation firms don’t care about because they don’t have enough money to make pursuing legal action worth their time. So if you are a participant in your company’s retirement plan, it’s up to you to let your employer know about the excessive fees you are being charged. See my previous post if you want to know how you can take action.

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