Securities Lawyers Blog
A recent article by Bloomberg highlighted a disturbing trend whereby brokers of independent brokerage firms have been able to make substantial profits while providing allegedly unsuitable investment advice and potentially tanking the retirement savings of potentially hundreds and maybe thousands of blue collar workers. These brokerage firms have been able to tap into large corporations with thousands of employees with 401(k) plans and convince them to rollover their accounts to their firm into IRAs. Once there, the brokers recommend unsuitable investments in an already tax-deffered account such as municipal bond funds and variable annuities. Some of the investments are extremely speculative and carry huge commissions and fees. In the end the brokers make hundreds of thousands in commissions while the investor is left with a depleted retirement account.
How the practice works is that brokers form connections with large employers in order to pitch their investment services to employees. Because the employer allows the broker to use their offices and facilities to pitch their investment services, employees often mistakenly believe that the company endorses or has otherwise evaluated the broker. In fact, these companies often have little to no relationship with the broker or a defined screening process.
According to Bloomberg, employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012. As a result, IRAs account assets are up to $6.5 trillion, more than the $5.9 trillion contained in 401(k)-style accounts. However, the shifts have been used by some Wall Street firms to profit at their client’s expense. IRAs often charge higher fees than 401(k) plans which provides brokers an incentive to promote rollovers.
In a typical 401(k), an employee sets aside money that their company often matches and allows the employee to invest in mutual funds. The funds aren’t taxed until withdrawal. When an employee leaves the company they can leave the money in the account, roll it over into an IRA, transfer it to another 401(k), or cash out the account and pay taxes. When employees choose to rollover into an IRAs with financial companies it preserves their tax deferral. While 401(k)s offer fewer investment choices than IRAs held at full service brokerage firms, large companies can negotiate for institutional discounts on the mutual funds they select. As a result, 401(k) participants often pay less than half the average percent of annual expenses as IRA investors.
A Bloomberg investigation found that employees at companies such as Hewlett-Packard Co., United Parcel Service Inc., and AT&T, have complained that brokers have persuaded them into rolling over their 401(k) accounts into unsuitable IRA investments. One broker with AIG company, FSC Securities Corp., allegedly cold-called employees of UPS according to a June 2013 complaint. Nine customers, including six UPS employees, alleged to have lost more than $1 million when broker Brian G. Brown rolled over their retirement accounts into risky oil and gas private placements, they said. Brown left FSC in 2010 to work for The Strategic Financial Alliance, Inc.
To be continued in Part II.
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