IS YOUR 401(K) AT RISK?

JAMES WYNN, AN ENGINEER IN WICHITA, Kansas, had been all set to retire to the Philippines with his Filipino-born wife. For the past four years he had set aside 20% of his salary to save $40,000 in his company's 401(k) retirement plan. Or so he thought. Wynn, 63, was unable to cash out and retire this year because all his money had vanished. And his was not the only missing nest egg. Also unaccounted for were the savings of more than 180 of his colleagues at International Technical Services, a firm in Melville, New York, that hires engineers and places them on jobs at companies around the country. Since then the Labor Department has brought a civil complaint accusing Ralph Corace, the former owner of the company, of looting some $3 million from the 401(k) funds. "You can't trust anyone these days," says Wynn. "I feel very betrayed."

That kind of betrayal is becoming widespread. Among the most popular and widely used government-sponsored retirement programs, 401(k) plans are surprisingly vulnerable to corporate fraud. So far, the Labor Department has launched investigations of 310 companies and recovered $3.5 million of plundered assets. While the probes involve a tiny fraction of the nation's 250,000 401(k) plans, they have revealed a disturbing pattern. "We have been surprised at both the number of complaints and the percentage that have been substantiated," Labor Secretary Robert Reich said last week. Investigators have found merit in 401(k) complaints at twice the normal rate for Labor Department inquiries. Often the money has been diverted for the most venal purposes. "Some companies," notes Assistant Labor Secretary Olena Berg, "have been using the money for hunting trips and lavish life-styles" for their officers.

Every payday, 18.5 million Americans have an estimated $747 million withheld from their wages and salaries and placed in 401(k) accounts, where money managers invest it in securities. Taxes remain deferred on the income and investment gains that accrue in the plans until the employees retire. But unlike traditional public and private pension plans, the 401(k) program, which has amassed $525 billion in retirement funds since it began in 1979, carries no federal insurance to protect employees against theft and mismanagement.

Most problems have come at small- and medium-size firms that were tempted to raid 401(k) accounts to meet financial crises. Companies have 90 days from the time they withhold the funds from paychecks until they are supposed to hand the money over to investment managers. But some bosses apparently view the extended grace period as an invitation to dip into the accounts for their own purposes. "There is no end to the creativity of the human mind," says Brian Schaefer, president of 401(k) Ventures, a consulting firm in Palo Alto, California. "This is a hard time in the economy, and people look at that money and say, 'I can borrow it for 90 days and no one will know.'" But that leads to trouble when they can't pay it back.