Could an American company loot its pension funds, as Robert Maxwell is alleged to have done in Britain?
The government has erected legal barriers, but they don't keep companies from trying. The Labor Dept. has filed dozens of pension-law-enforcement actions this year against companies like Landev Inc., a Connecticut land developer. The department charged in federal court in June that Landev's owners lent 77% of its profit-sharing plan and 37% of its pension plan to real-estate development partnerships in which the owners held stakes. Landev is now in bankruptcy. The owners are contesting the charges.
Pensions are protected by the 1974 Employee Retirement Income Security Act, which bars a long list of transactions with "parties in interest" in a plan, including the employer's officers and directors, the plan's trustees and advisers, and relatives of those parties. "I can't invest my firm's pension in my brother-in-law's real estate deal or buy its business supplies from my wife's shop," says New Orleans attorney Howard Shapiro. ERISA spells out stiff tax, civil, and criminal penalties for officers, trustees, or investment advisers who get caught violating their duty to protect pension assets.
Catching them, however, isn't always easy. The Labor Dept.'s Pension & Welfare Benefits Administration has about 400 investigators, aided by a like number of Internal Revenue Service agents, to monitor 900,000 pension plans and 4.5 million health, dental, disability, and legal benefit plans. The PWBA has beefed up its efforts after a decade of decline: A hundred of its agents were hired just in the last year. But "there just aren't enough people to review all the plans," says Ian D. Lanoff, a former ERISA administrator.
A WEAKNESS. In practice, the Labor Dept. depends on advisers, accountants, and banks to police the pension system. Most of the 60,000 large plans that cover 100 or more employees and retirees hire bank custodians and outside investment advisers, who have a legal duty to investigate and block suspicious deals. Since large plans hold 85% of the $2 trillion in U. S. pension-fund assets, most workers have some measure of independent protection. These plans also must submit to an annual audit, but those audits have a weakness. Auditors aren't required to verify assets held by financial institutions. Labor's Inspector General wants that exemption repealed.
For some 840,000 small plans, ERISA requires only an annual report, but that report does not have to be audited. Just as important, the law doesn't require independent trustees or custodians. "The sponsoring company can appoint its own officers as trustees, advisers, and custodians," says Randolph Westerfield, finance professor at the University of Southern California. And that poses a conflict of interest, says Peter I. Elinsky, partner at KPMG Peat Marwick: "If the bank's coming over to shut down Elinsky Pie & Donut, I'm going to look at every source of money I've got."
Robert Maxwell may have fallen to that temptation. And though the U. S. has plenty of laws on the books aimed at preventing similar pension abuses, it still can happen here.