Troubled companies rob benefit plans

January 11, 1994|By Los Angeles Times

The pension savings and health coverage of thousands of workers are at risk because financially troubled small-business owners increasingly are diverting funds earmarked for employee benefits to other corporate purposes, federal officials say.

Ranking officials in the U.S. Department of Labor say they have discovered a growing problem involving ailing companies stealing worker contributions to the highly popular 401(k) pension plans and health insurance premiums -- a federal felony.

While labor officials pledge to prosecute all such violations, pension experts maintain that official sanctions often come too late to help workers, who may find serious shortages in their retirement savings or discover -- after filing a claim -- that their health insurance was canceled.

"I'm out thousands of dollars," said one Los Angeles employee, who asked not to be named for fear of reprisal from his former boss. "But we didn't know there was a problem until the company filed bankruptcy. Then it turns out there's something like $150,000 missing from our 401(k) plan and no one has the money to pay it back."

The problem is particularly acute in economically troubled parts of the country, such as the Northeast. The Department of Labor's Boston office has filed numerous civil lawsuits that allege such pension and heath care violations, while officials at the Los Angeles office say they are investigating numerous claims as well.

Unlike other types of pensions, there is no government guarantee fund for so-called defined contribution plans, such as 401(k)s. Nor is there government backing for health plans gone awry. Unless the company, its managers or pension plan trustees have the money to repay funds borrowed, "diverted" or stolen from from 401(k)s and health premiums, workers are simply out of luck.

"It can happen all too frequently, and when it does, it has particularly tragic consequences," said Alan Lebowitz, deputy assistant secretary of pension and welfare benefits with the U.S. Department of Labor.

"We have brought civil cases. We have referred cases to the Justice Department. Unfortunately, in many instances, there is little that can be done [to compensate workers] because there is no money there."

Pension and health care fraud is not new. There have been isolated incidents of labor fraud -- perpetrated by both companies and labor unions -- since health and pension benefits were first instituted. But industry observers say this kind of fraud has become far more common in the past few years.

The problem appears to be the result of three factors working in concert: a sluggish economy, a credit crunch that has made it hard for smaller companies to borrow, and the rising popularity of benefit plans such as the ubiquitous 401(k).

The latest recession was unusually tough on small businesses, and came as bank lending standards were tightened, said William J. Dennis Jr., senior research fellow with the National Federation of Independent Business Foundation in Washington. That made it virtually impossible for ailing businesses to borrow their through bad times, he said.

"We had run into financial difficulties and I was unable to get a loan," said a company owner who was sanctioned by the Labor Department for siphoning off worker pensions to pay the company's bills. "It's not something that I'm proud of . . . when you've got to pay your light bill and make your payroll . . . you don't have a lot of alternatives."

While no statistics are compiled, Labor Department officials say the amount of pension and health insurance fraud is small compared to the 2.5 million plans in operation. But, the incidence of fraud is high enough among ailing small businesses that labor officials suggest that employees carefully monitor their accounts.

Serious violations are rare at large companies -- those with more than a few hundred employees. Experts believe that is mainly because this type of fraud requires top officers to agree to an illegal act. The more top officers there are, the less likely that they'll conspire to break the law.

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