State attorneys are investigating a financial company for the way it handled money set aside for investment by thousands of state Department of Education and University of Hawai'i employees.

DOE and UH officials yesterday promised employees that they will make up any financial losses. In question is how Plan Compliance Group Ltd. of Walnut Creek, Calif., under contract to those state agencies, managed employee contributions, officials said.

Attorney General Mark Bennett, in a statement, called it "an extremely serious matter" that is being investigated by his staff.

An attempt last night to contact officials with Plan Compliance Group Ltd. was unsuccessful.

Schools Superintendent Pat Hamamoto, in the same news release as Bennett, said funds managed by Plan Compliance "were not timely deposited, nor in some instances credited, into DOE employees' individual accounts, even though the monies had been withheld from employees' pay per their directions, and then forwarded to PCG for deposit."

Hamamoto said the DOE, on the advice of state attorneys, "from its own funds, made certain that the amounts that had been withheld from its employees' pay, but not deposited, were then deposited into the appropriate accounts."

The problems involve money set aside for tax-sheltered annuity funds and were first noticed three months ago. Once DOE and UH officials realized there were problems, they took over disbursement of the money and notified the attorney general's office.

Officials declined to say how many employees and how much money is involved.

At UH, 2,600 employees are in the plan, although not all may be affected, said Edward Yuen, UH director of human resources.

Yuen estimated that as much as $420,000 is involved, and said UH will advance that money to employees to make up the losses. "As best we can tell, some of the transfers for the Sept. 15 and Sept. 20 payroll were not made," he said.

He said the university is not ruling out legal action.

"We're going to advance the money to minimize any negative impact on our employees," he said. "But obviously, we'll be looking to get it back from PCG, as will the DOE.

"Certainly we'll hope that PCG will make good on the amounts and that (legal action) won't be necessary."

The UH and public school systems previously administered employee annuity funds on their own. But several years ago, the Legislature required that they hire a third party to collect the money and transfer it to the mutual-fund companies designated by respective employees.

The management group was selected around 1999 or 2000 by UH to manage investments for some of its employees, and in 2002 by the DOE to manage investments for many employees. The company was especially attractive because it had no products to sell, and because as many as 13 other school districts had money managed by the group.

Joan Husted, executive director for the Hawai'i State Teachers Association, said she and union president Roger Takabayashi are pleased by the DOE's actions.

Husted said an official with one of the annuity programs told her that even a short delay in money deposits could result in the loss of investment gains for employees.

"What I was told is that the DOE discovered that the plan administrator was not investing the money in a timely fashion," she said. As a result, she said, "there was the potential that participants in the various annuities may not have done as well investment-wise because the money was coming in late."

Husted said it was her understanding that the alleged impropriety was discovered soon after it began.

Problems first came to the university's attention when the local office of PCG closed and the local representative resigned, said Yuen.

"That was suspicious in itself," said Yuen. "We started following up to find out what was going on."

On Thursday, interim UH President David McClain sent letters to university employees alerting them to actions the university was taking and offering details about the Tax Sheltered Annuity Plan in question.

"The University of Hawai'i has learned that the TSA Plan funds for the September 15 and 20, 2005, payroll that should have been sent by Plan Compliance Group (PCG) were not transmitted to all service providers," wrote McClain.

"The university is in the process of transmitting these payroll payments to the service providers who did not receive funds from PCG.

"Issues have also arisen as to delays in the transmission of payroll funds for periods prior to September 2005," he wrote.

"We are also taking action to address these issues."

McClain said that until further notice, UH will handle financial transactions for the annuity plan.

Yuen said the first problem with PCG arose about three months ago regarding the length of time transfers were taking.

"We were just concerned because one of our employees had said he was following his accounts, and the deposit wasn't made for a while, and we followed up on that," said Yuen.

"We spoke with them, and they explained that they had changed banks, and they had stopped their relationship with their former bank and (there was) some mix-up in the process, and we took them at their word for that.

"Everything seemed fine to us."

Yuen also said that the university had been pressing the firm to make all of its transfers electronically.

"They were electronically transferring some, but not all," he said. "They still had accounts they were mailing checks to."

Reach Beverly Creamer at bcreamer@honoluluadvertiser.com and Gordon Y.K. Pang at gpang@honoluluadvertiser.com.