The Advisor Took the Money and Ran

By Richard Kutikoff • May 16, 2017 • 0 Comments
It’s Friday at 4:59 p.m. and you answer the phone; it’s your client Fred. He’s a good client; he owns Fredco, a construction firm with 20 full-time employees who have been with him for many years. His pension plan has assets of about $1 million and a funding target of about $1.1 million. Fredco is both the plan sponsor and plan administrator; Fred is the Trustee. Nothing out of the ordinary.

He says, “I’ve got a problem; my investment advisor Mortimer died. My new investment advisor noticed that the pension records showed that I had invested $400,000 in several limited partnerships. I told him that Mortimer ‘arranged’ for these investments five years ago because they added diversification. He said that it looks like the $400,000 is gone; it was never actually invested and ‘disappeared.’”

You take a deep breath, realizing that the weekend will be delayed. 

Yes, this does happen. It’s infrequent, but when it does, it can get messy. As his actuary, you have to focus on two aspects of the situation:
1. What technical rules have to be followed? Who gets notified? By whom? What are the deadlines? What are the consequences?

2. What is your role? Are you simply the Enrolled Actuary? Or are you both the Enrolled Actuary and a consultant (i.e., TPA)?

Question #1 involves identifying a list of issues and interested parties — IRS, Department of Labor, PBGC (remember, this is a construction company), plan participants, Fredco’s bank (because they lent money to Fredco based on audited financial statements reflecting FASB calculations that you prepared) and his fidelity bonding company.

Question #2 is particularly challenging. Fred has been a good client and you really want to help him. However, when situations get messy (and this will get very messy, very quickly), you have to be extremely careful to perform your role, and not anyone else’s.

First of all, let’s focus on the technical issues. After all, actuaries love technical issues.

Plan Asset Value

Each year the Trustee is responsible for providing the plan asset value to the plan administrator. If some of the assets were never really there, did the Trustee overstate the asset values? Will that require redoing all of the prior calculations? Can any potential reimbursements be reflected in the prior assets values, thus minimizing the impact of the loss, if:

  • most or all of the loss is expected to be reimbursed from the bonding company, 
  • there is an expected recovery from Mortimer’s estate, or 
  • Fredco (or Fred’s pension plan) has any other insurance that could reimburse these funds?

Or can the Trustee claim that this was his best valuation of the plan assets at that time, and will stand by it?

Form 5500 

  • There is a box asking if the pension plan lost money due to fraud or dishonesty, whether or not reimbursed. It is rarely checked; when it is checked, it sticks out. 
  • Don’t be surprised if an inquiry from the IRS or DOL follows.
  • Do prior Form 5500s have to be amended, since plan asset values were materially overstated? Would new annual funding notices have to be provided to participants?
  • Would amended Schedule SBs have to be prepared, possibly resulting in funding deficiencies? Would excise taxes and penalties have to be paid (late filings of Form 5330)?


Would AFTAP certifications have to be redone? 

Would the plan’s qualification be in jeopardy because: 

  • the previously reported AFTAPs of over 80% are now under 60%?
  • neither 101(j) nor 204(h) notices were ever provided? 
  • the plan was amended two years ago?
  • lump sums were recently paid?


  • If assets were previously overstated by $400,000, there might be additional PBGC premiums totaling around $50,000 for the past five years, plus interest and penalties (assuming an average variable premium of 2.5% of the $400,000 increase in unfunded vested benefit liability for five years).
  • Would the PBGC raise any issues since the UVBL has just increased by $400,000?
  • Note that PBGC filings would not have to be redone if the original filings used the small employer cap.
  • Would the PBGC have to be notified if this results in a funding deficiency?

Fredco’s Financial Statements

  • Fredco provided audited financial statements to their bank to get a loan three years ago, and continues to provide audited statements because the loan covenants required a minimum equity level to be maintained; otherwise the loan would be callable. Each year, you provided Fredco with the pension calculations under ASC-715.
  • Will their auditor require the old financial statements to be reissued? 
  • Could the bank claim they wouldn’t have issued the loan had they known the truth about the funding level of the pension plan? 
  • Fredco’s current equity level will be reduced, potentially violating the loan covenants.
Fidelity Bonding Company

  • How does Fredco file a claim so that the $400,000 may be replaced by the bonding company? 

As you can see, there are many potential issues that we don’t typically think about. And it can have a nasty ripple effect.

Now let’s consider your role. What is your responsibility and what is not?
  • Fredco filed the original Form 5500s with the IRS and DOL.
  • Fredco made the original PBGC premium filings.
  • Fredco provided required notifications to plan participants.
  • Fredco provided information to his auditor and sent company financial statements to his bank. 
  • Fredco obtained the fidelity bond.

Since the forms were actually filed (and notifications sent) by Fredco, and not by you, Fredco is responsible for updated filings and notifications.

However, since most of these items included actuarial information that you provided (Schedule SB, the UVBL for the PBGC premium filing, the AFTAP certifications, the FASB calculations), ERISA, the IRS, the Joint Board, and Codes of Conduct of the applicable professional organizations may require that you amend some or all of the information that you previously provided.

Importantly, before any work is done or notifications are made, Fred should get an attorney. 

  • The attorney should know the legal answers to many of these questions and the best manner in which to work with the interested parties.
  • The attorney coordinates all filings, notifications and responses, including any EPCRS filings.
  • If making this investment was a breach of fiduciary duty, the attorney’s role would be critical.
  • Discussions between Fred and his attorney will generally be protected by privilege. (A comment from Fred that he “didn’t really check into the underlying investments and just blindly took his advisor’s word” is probably not the best information to be disclosed.) Perhaps his attorney should hire you as an actuary to potentially extend this privilege to you. 
  • It might worthwhile for you to hire your own attorney.
  • Should his investment advisor’s actions be reported to a federal, state or local agency? The police? Let the attorney handle this.

As the Enrolled Actuary, you may have a professional obligation to provide amended certifications (Schedule SBs, AFTAP certifications, PBGC variable premium certifications, FAS-87/ASC-715 calculations). But in terms of the tactics involving the various notifications, that’s between Fred and his attorney.

If your role is already that of a consultant (or TPA) in addition to Enrolled Actuary, Fred already expects consulting advice from you. Most or all of this should still be under the direction/guidance of his attorney. Your background with the client can provide a valuable addition to the legal services provided by the attorney, but only if you’ve got the expertise and background with the client.

Finally, some of the other possible issues that could arise include:
  • What if the fidelity bond was never increased to cover these non-qualifying assets?
  • What if the pension plan covered more than 120 participants, so that plan audits were already required each year?
  • What if the amount of assets involved was only $40,000 instead of $400,000? 
  • What if Fredco (or his attorney) does not want to make any retroactive filings or notifications? What would your responsibilities be as an Enrolled Actuary?
  • What if your relationship with Fredco has been tenuous in the past?
  • Should you get a retainer for your anticipated fees?
  • What if the pension plan covered only the owner?

So much for your weekend.