I must admit I am a bit of an odd fellow. For example, I enjoy Italian opera (Puccini, please!) while at the same time slowly banging my head (slow being important at my age) in time to the soaring vocals of heavy metal's Rob Halford of Judas Priest (Have a listen to Priest's epic anthem, Private Property!). I am equally comfortable in a three-piece suit (custom tailored for the win!) as I am in a multi-colored tutu. And yes, I do like pineapple on my pizza.
Against this backdrop, I don't just read 401k articles. I try to understand and summarize how they might impact my 401k clients. With the weekend winding down, I was reading the case of Julie Su, U.S. Department of Labor v. RiversEdge Advanced Retirement Solutions LLC et al. In this situation, the Department of Labor (DOL) is alleging RiversEdge, a third-party administrator (TPA) firm, stole $5.5 million from 17 client plans. The plans apparently included 401(k), 403(b), deferred compensation and profit-sharing plans.
As I pondered this situation, I was taken back a decade when the CFO of one of my retirement plans was enjoying a glass of chilled Chardonnay with me onboard our floating office, the HMS Our Retirement. The topic of the purpose of 401k fidelity bonds came up as we sipped our wine, nibbled on cheese and crackers, and watched the sunset. Yes, I am odd to be discussing fidelity bonds but hey, pineapple on pizza!
In any case, the CFO was curious about the purpose of a fidelity bond. I explained that a fidelity bond is a kind of insurance protection against any kind of mishandling or fraud perpetrated by individuals in charge of handling 401(k) accounts. He pressed further. How exactly could money be stolen from a 401k? I had no idea as I had never considered this idea. It is not a world I inhabit. And unlike Sherlock Holmes, I do not possess the ability to think like a criminal so I can better catch a criminal.
In any case, over more wine, cheese, and crackers, we concocted a way money could be stolen from a 401k. It was so far-fetched with dummy accounts, checks and balances being blown, and people in charge looking the other way that we were laughing ourselves silly by the end of the exercise. It was also so much effort for so little money that it makes sense, per Michael Bonfante at fidelity bond provider, Colonial Surety, that criminals go for large scale theft and not small individual account theft.
But riffing off of that, I found myself wondering how the TPA allegedly could have performed the posited action. 401k contributions are deducted from an employee's paycheck and held in the company's checking account. Those funds are then debited from the company account by the plan's record keeper, sent to the plan's custodian (a separate company on all of my plans) who then credits the money to the employee's 401k account. Seems pretty straight-forward and seamless, right?
I am thinking that my system of checks and balances must not have been in place because I am really not seeing how the TPA managed this. According the complaint, going back as far as 2017, the TPA made multiple transfers of plan assets from a corporate custody account at custodian, Mid Atlantic Trust Company to an account at PNC Bank for FBO RiversEdge Advanced Retirement Solutions. The DOL complaint goes on to say that "RiversEdge made no transfers from the PNC account back to any account at Mid-Atlantic Trust.” Perhaps the hiccup is in having the extra transfer to PNC?
In any case, the $5.5 million was allegedly stolen between October 2022 and January 2024. Might more be missing since this transfer pattern has been traced back to 2017? I lack the ability to think like this with such ill-intent.
And since I don't have someone versed in Operations sitting with me this evening, I will go back to listening some Johnny Mathis. But tomorrow, I will call my TPAs to better understand how this could have happened. I need to know about this and my clients certainly will ask.