He figured wrong. Thomas Brown, whoowned Winom Tool & Die, deducted the money from plan members’ paychecks but didn’t reserve it for their accounts. The company went broke, owing its 401(k) more than $192,000. Brown pleaded guilty to a criminal charge of lying about the plan’s condition and will be sentenced in February. Cold comfort for Edwards and his fellow employees. “I trusted everybody,” he says, “but you have to forget about trust.”

Copy that sentence and tack it to your office door. Most 401(k)s are safe, but only because the companies that run them voluntarily follow the rules. For your so-called protection, the government imposes some modest auditing and reporting requirements. At bottom, however, it’s little more than an honor system that works for most savers at the expense of a defrauded few. A big company in financial trouble could “borrow” your 401(k) funds just as readily as Winom Tool & Die did.

At this point the size of the 401(k) fraud problem isn’t known. Secretary of Labor Robert Reich says that twice the number of 401(k) complaints from the public turn out to be true compared with complaints about other problems in the workplace. Lastweek the Labor Department’s Pension and Welfare Benefits Administration (PWBA) disclosed an anti-fraud campaign that has so far recovered $3.5 million for employee plans. Five prosecutions are underway; 310 investigations remain open. But some of the money is gone for good. More discussion is needed about securing 401(k)s–now the nation’s fastest-growing pot of retirement savings.

Big money: A 401(k) is set up by a corporation for its employees. Your contribution is tax-deferred until you take the money out; ditto the earnings on your funds. About 80 percent of employers add to the money you put in, reports Access Research in Windsor, Conn., most often giving you 50 cents for every dollar you invest. in just 14 years of existence, 401(k)s have amassed $525 billion for 18.5 million employees.

As a cheek on whether the money is there, the law requires only that you receive a summary of your plan’s annual report. To us amateurs, that generally means zip. What you need, instead, are the details of the gains and losses in your account, which your employer needn’t disclose unless you ask- in writing and only once a year. Good companies, however, usually contract with outside providers to send reports automatically, sometimes as often as once a month.

The bad guys provide no reports at all, and that’s often where the trouble starts. By the time the workers get worried enough to send up flares, their retirement money may be gone. Or it may be poorly invested, in real estates or other inappropriate assets.

Clearly, more regulation is needed-but exactly how much? Reich says that the government doesn’t want to “discourage small businesses from setting up these plans because of abuses by a few.” Cost-benefit judgments have to be made. How many Brian Edwards families can be thrown to the wolves so that luckier folks can have plans of their own? Here are the reforms on Reieh’s mind, ranked according to their chances of taking effect:

Stop firms from using your money as a 90-day checking account. Your 401(k) contributions are supposed to hit your account on the “earliest reasonable” date or, at most, within 90 days. Some firms routinely wait 90 days, reasonable or not. That not only deprives you of earnings. In troubled firms, you’re also at risk that the company will fail with your money in its pocket. Reich plans to shorten the period dramatically. (It’s not clear if he’ll change employer contributions, which often are paid only once a year.)

Require faster information from audits. Believe it or not, if an auditor checks your 401(k) plan and notes a possible fraud, it might take a year to hit the PWBA’s computer screens. Reich has proposed legislation to require prompter reporting. But Congress has weightier things on its mind (like cutting the fraud-enforcement budget). Incidentally, if you work for a company with fewer than 100 workers, its 401(k) plan doesn’t have to be audited at all.

Install independent trustees. Trustees certify that the money in your 401(k) is being handled properly. But employers can name themselves as trustees–which won’t help much if they’re the ones diverting funds. The Labor Department’s independent advisory council suggested this year that 401(k)s have outside trustees.

Require more frequent employee reports. A year is too long to wait to see if your money has arrived, and many employers agree. Some 74 percent of 401(k) plans offer quarterly reports. A small but growing percentage give you daily access, by phone.

The government is publicizing ways you can watch the plans yourself. Among them: check your pay stubs, to see if the sum deducted from your check actually made it into the plan; go on red alert if contributions don’t arrive within 90 days; screech if your 401(k) reports are late.

But let’s get real. Most reports don’t show when money went into the plan. As for screeching, it might cost you your job–especially in smaller firms. It’s unreasonable to expect the workers to boss the boss.

Watchdogs needed: But watchdogs are on hand, if Congress would only deputize them. A 401(k) plan often employs an outside trustee, a recordkeeper or an investment manager–any of whom will know when an expected contribution doesn’t come. But as things now stand, no one has to tell you or, for that matter, the PWBA. This professional omerta multiplies your loss. Had you known the truth, you’d at least have stopped putting new money in.

At International Technical Services (ITS; now defunct, but formerly in Melville, N.Y.), suspicious employees sought information for months after their 401(k) reports stopped. The boss wore the trustee’s hat. So they called the plan’s recordkeeper and its investment manager, to find out if their money was safe.

As is typical, they learned nothing at all. The investment manager, Equitable Life Assurance Society, first said the plan was OK but later clammed up, says Leonard Cummings Jr., formerly an ITS contract engineer. Equitable’s James Lacey says that, as a matter of policy, the company doesn’t respond to employees’ questions about their individual accounts. ITS’s rooked plan members are suing everyone in sight, for losses of $3 million or more. Cummings himself says he’s out $10,000 to $15,000.

On the “who, me?” principle of civic responsibility, most firms that service 401(k)s want nothing to do with the job of unmasking crooked plans. Except the “father” of 401(k)s, Ted Benna of the 401(k) Association in Langhorne, Pa. His contract with clients says he’ll squeal to the PWBA if money doesn’t arrive on time. To get around secretive bosses, employees should get reports that are mailed to them at home, says Robert Liberto, vice president of the New York actuarial consulting finn the Segal Co.

Most of all, plans need outside trustees whose duty it is to shout aloud. By all means complain to the PWBA about missing 401(k) reports (call 202-219-8776). But if business and government expect us to finance retirement ourselves, they have the duty to make the system more secure.

401(k)s are growing faster than any other retirement plan, and they’re riskier than traditional pensions. Future retirees, particularly those in smaller[a] companies’ plans, are in danger of having their pockets picked.

Total plans 242,000 In smaller companies 233,700 Total participants 18.5 million In smaller companies 5.47 million Total assets $525 billion In smaller companies $132 billion All plans Average account balance $27,000

a WITH FEWER THAN 500 EMPLOYEES.

SOURCE: ACCESS RESEARCH, INC.