WASHINGTON - The Labor Department's new campaign against 401(k) plan fraud is designed to jumpstart stalled legislative and regulatory programs that would reform the Employee Retirement Income Security Act.
In particular, the Labor Department hopes to get legislation introduced this week that would wipe out limited-scope audits of plans and increase plan auditors' responsibilities. It would increase auditing fees paid by the plan sponsor by nearly 30%.
The bill - the ERISA Enforcement Improvement Act of 1995 - would force auditors to either issue a complete opinion on the security of all plan assets, or to immediately report any problems to the Labor Department. In effect, auditors would become policemen for the Labor Department.
Now, auditors need not examine plan assets held in certain financial institutions already regulated by the federal government, such as banks and insurance companies.
The enforcement bill has been stalled for several years, and Labor Department officials hope the publicity surrounding the finding of fraud and malfeasance in a number of small 401(k) plans will get it moving.
Sources expect Sen. Jim Jeffords, R-Vt., and possibly Sen. Paul Simon, D-Ill., to introduce the bill.
The Labor Department wants to send a new message to plan participants - whom Secretary Robert Reich already has frightened with his public warning that their 401(k) assets may be jeopardized. Now, he wants to tell participants their plan assets would be safer if someone were held responsible for the security of the plan.
One irony, however, is while Mr. Reich has said most of the 401(k) fraud his department uncovered occurred in plans with fewer than 100 employees, this legislation would not help to protect smaller plans. Current law states plans with fewer than 100 employees do not require audits; Labor Department officials said the legislation would not expand the audit requirement to the smaller plans.
"Aren't these the plans that we're concerned about?" asked Howard Golden, principal at Kwasha Lipton, Fort Lee, N.J. "There's no audit for plans that really may need it."
Still, with this legislation, the Labor Department could help protect plans from abuse because it would know in a short amount of time if plan assets are being misused. The Labor Department doesn't think limited-scope audits are worth much, because they only look at parts of the plan's assets. Auditors are allowed to disclaim whether the financial statements are fairly presented.
"If you are going to have an audit, it should have meaning," one Labor Department official said.
"The audit report, right now is not very valuable," another department official said. "They provide no comfort whatsoever about the plans' assets."
The bill also would put new professional education requirements on plan auditors, and would impose fines of up to $100,000 on plan administrators or auditors if they knowingly withhold reporting violations.
The legislation would first require the plan administrator to report any alleged irregularities - within five days of detecting them - to the secretary of labor. If an auditor sees something's going wrong with the plan assets, the auditor must notify the plan administrator within five days. If the auditor doesn't hear back from the plan administrator within five days, the auditor then has to report the violation to the secretary of labor on the sixth day. If the auditor thinks the plan administrator is involved in the violation, the auditor has to go straight to the secretary.
Violations include theft, embezzlement, extortion, bribery and kickbacks, according to a draft of the legislation.
What's more, the legislation says the secretary of labor has the right to draft additional enforcement regulations. Labor Department officials said these could include regulations that would either suspend or permanently ban auditors from auditing ERISA plans.
The American Institute of Certified Public Accountants, Washington, endorses the concept of the bill. But Sue Hicks, the institute's technical manager, said plan administrators and auditors who make an earnest effort but find out later there were problems should not be held liable.
Almost half of all plan audit reports have used disclaimers because assets are held in exempted financial institutions, according to a letter to Vice President Albert Gore from Mr. Reich. In addition, more than $950 billion in plan assets is not audited. And, even after getting two chances to correct mistakes, more than 1,000 annual reports were rejected based on second-rate reports over the past two years, the letter said.
Several observers believe the department's efforts seemed unconnected to the 401(k) fraud issue. It seemed to many that the Labor Department is trying to hand over to the private sector its responsibilities to police pension plans.
"The part that is distressing is that you're making a government agent out of the auditor," said Chet Salkind, executive director of the American Society of Pension Actuaries, Washington. "The end result is" higher fees, he said.
The AICPA's Ms. Hicks said costs may increase anywhere between 10% and 40%, while the Labor Department estimates 30%, depending upon how much the plan holds in currently exempted financial institutions.
In addition to the current legislation, Labor Department officials are studying current rules giving plan sponsors a maximum of 90 days to put employee contributions into the plans.
Mr. Reich also said he would assess the suggestion from the ERISA Advisory Council to require an independent third party to serve as a plan trustee.
And while many observers said these new restraints would hamper 401(k) plan growth, Mr. Reich said he only wants to ensure these plans are run well.
"We want to encourage 401(k) plans," he said. "We don't want to discourage them. We want to minimize fraud or abuse.'