WASHINGTON - The owner of a benefits consulting firm has been banned by the Department of Labor from serving as his company's plan trustee after he invested nearly 70% of the plan assets in company stock.
Robert J. Dema, owner of CPI Qualified Plan Consultants Inc., Great Bend, Kan., and sole trustee of the company's $1.2 million 401(k) plan, agreed to pay back the $820,000 - plus interest - in plan assets he used to buy the preferred company stock.
Oversight of the plan has been turned over to an outside trustee, Investors Services Trust Co., Overland Park, Kan., but it still holds 160 shares of the company stock, Mr. Dema said.
In its suit filed in U.S. District Court in Wichita, the Labor Department contended the CPI plan purchased 820 shares, or 100% of CPI preferred stock, at a time when the company was highly leveraged and when the common stock had been seriously depreciating in value. The Labor Department faulted CPI executives and Mr. Dema for allowing the plan to hold onto the preferred stock knowing - for several years - that the company was not doing well.
Furthermore, the department said that by July 1995, Mr. Dema knew the fair market value of the preferred stock had fallen below par value. In an interview, Mr. Dema said that while he agreed the common stock was depreciating, the preferred stock never lost its $1,000 per share par value from when it was purchased in October 1993. A Labor Department official said he could not comment on this because the disparity is considered proprietary information.
Because the company is privately held, Mr. Dema said he thought there was less risk in investing in something he and his employees could control. Because CPI is a service company, Mr. Dema said success or failure of the business hinged on employee performance; owning shares of the company stock provided an incentive for employees to do well, he said.
"They all talk about empowering employees, but when it gets down to the trenche....that's really not true," Mr. Dema said. "We thought what we were doing was in the best interest of plan participants, and that we were not just treating them as plan participants."
Mr. Dema added the company did not want to create an employee stock ownership plan because the preferred stock holdings were not intended to be a long-term asset for the plan.
The Labor Department also contended the plan never received the annual 15% dividend it should have received for its preferred stock holdings as it was supposed to. But Mr. Dema said the preferred stock was never intended to pay annual dividends, but to function like a zero coupon bond and to be paid out upon redemption.
Both the Labor Department and Mr. Dema said participants did not lose benefits through the preferred stock investment. Mr. Dema said CPI will be purchasing the shares back from the plan over the next four years.