DOL Charges TPA Embezzled ERISA Plan Assets

Pittsburgh, PAOn February 5, the Western District of Pennsylvania issued a Temporary Restraining Order barring RiversEdge Advanced Retirement Systems, LLC and Paul Palguta, the company’s sole owner and president, from accessing the assets of various ERISA retirement plans. The Department of Labor has accused the third-party administrator of misappropriating and misallocating retirement plan assets from seventeen retirement plans, fourteen of which were covered by ERISA. The defendants also are alleged to have transferred assets among the trust accounts for these plans and generated false records to conceal these transfers. The fraudulent information provided to the plans duped them into filing false reports with the DOL, which further frustrated discovery of the embezzlement.

At the inception of this action, RiversEdge had assets from at least 240 retirement plans under its management. The DOL is pushing for a permanent injunction against RiversEdge and Palguta, as well as an order to restore the embezzled assets to the affected retirement plans.

“Insufficient cash” notice triggers investigation

According to the complaint, on or about October 27, 2023, Palguta placed an order to buy shares for a non-ERISA plan called the Beaver County Deferred Compensation Plan. However, the Beaver County Plan did not have sufficient cash available to complete the order. Mid Atlantic Trust Company, doing business as American Trust Custody and Charles Schwab Trust Bank are the custodians of assets for many of the ERISA Plans involved in this lawsuit. Although Palguta later remedied this shortfall, the problem caused the custodians to initiate an audit.

A detailed probe by the Employee Benefits Security Administration, the DOL unit in charge of enforcing ERISA provisions, found that between October 2022 and January 2024, RiversEdge and Palguta systematically diverted funds from retirement plan trusts to corporate accounts under their control. The unfolding tale involved a complicated shell game with multiple accounts and multiple identities used by Palguta.

Ultimately, Palguta and RiversEdge allegedly managed to skim more than $5 million from ERISA and non-ERISA retirement plans into personal accounts. The shortfall in two ERISA plans alone totaled approximately $2 million. The RiversEdge defendants have refused to concede liability but consented to the preliminary injunction and the reforms requested by the DOL for the duration of the lawsuit.

ERISA protections and charges

ERISA section 404 requires that plan fiduciaries act solely in the interest of the participants and beneficiaries of ERISA Plans and for the exclusive purpose of providing benefits to participants and their beneficiaries. Subsequent sections of the law specifically prohibit various forms of self-dealing, called “prohibited transactions.”

The complaint charges Palguta and RiversEdge with five specific breaches of these basic fiduciary duties. Specifically, the DOL has charged the third-party administrator with:

• Failing to act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct;
• Engaging in prohibited transactions, specifically transferring ERISA plan assets to RiversEdge, a party in interest;
• Further engaging in prohibited transactions by dealing with ERISA plan assets in their own interests;
• Engaging in transactions involving ERISA Plans on behalf of a party whose interests were adverse to the interests of the ERISA plans’ participants and beneficiaries; and
• Failing to take reasonable efforts to remedy the breaches.

It should be noted that the charges under ERISA and the remedies sought are civil, rather than criminal in nature. The real goal is to get the money back.

401k plan vulnerabilities

Some have speculated that the assets held in defined contribution plans, like the 401k plans managed by RiversEdge, are more vulnerable to the risk of mismanagement or outright fraud than the money held in traditional defined benefit plans. Over the past decade, there has been a precipitous increase in the number of ERISA lawsuits, many of which focus on what might be described as negligent, rather than fraudulent management of fees.

Su v. RiversEdge highlights a larger problem. It is important to watch the transfer of assets from retirement plans to a mushrooming financial services industry for severala reasons.

• First, the risk of loss in value of plan assets falls on the participant in a 401k plan, rather than the plan sponsor or employer. This may reduce the incentive for the sponsors to monitor management irregularities.
• Second, 401k plans that offer participants the chance to choose among a menu of investment options may require more active management than the traditional plans that do not. In general, more active management generates more fees for the administrator.
• Finally, a participant’s anticipated 401k retirement nest egg is not insured by the Pension Benefit Guaranty Corporation, as defined benefit payments are.

The EBSC may ultimately get the money back for the victims of RiversEdge’s fraud. But this remains a cautionary tale about how important it is to actively monitor financial service providers.