Service Provider Fraud in Employee Benefit Plans: Risks, Examples & Prevention Tips

Key Takeaways

• Verify plan assets independently by reconciling to custodial statements obtained directly from the custodian, not through the service provider.
• Review SOC 1 reports annually and ensure all complementary user entity controls are implemented and functioning as required.
• Maintain active oversight of service providers through careful selection, ongoing monitoring, and periodic independent confirmations or surprise reviews.

Understanding Service Provider Fraud in Employee Benefit Plans

Service providers such as recordkeepers, custodians, and investment managers play a critical role in employee benefit plans. Because they have access to plan assets and participant data, they can present a fraud risk if proper oversight and controls are not in place.

In this episode of Ask an EBP Auditor, Ellen Alphonso explains how service provider fraud can occur and shares a real-world example of an investment advisor who falsified statements and misappropriated funds over several years before the fraud was uncovered through independent verification.

How Plan Sponsors Can Reduce Fraud Risk

While service provider fraud is relatively rare, its impact can be significant. Plan sponsors can reduce risk by maintaining strong oversight and verification procedures.

Key Prevention Steps

• Carefully select and regularly monitor service providers
• Review SOC 1 reports and implement complementary user controls
• Reconcile plan assets to custodial statements obtained directly from the custodian
• Perform periodic independent confirmations or surprise reviews

Stay tuned for the next video in this series, where we discuss fraud risks involving plan management and administrators.