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.