Investors Get Steamrolled By IRA Rollovers

Employees who retire from big companies like Hewlett-Packard Co., AT&T Inc. and United Parcel Service Inc. are being fleeced by stockbrokers who induce them to roll over their 401(k) nest eggs to Individual Retirement Accounts – IRAs – and then buy investment products that pay higher commissions to the brokers, according to a recent Bloomberg report.

Brokers have lured retirees from these companies who have benefited from low cost 401(k) investments to switch to IRAs, with some making dubious claims of expertise in retirement planning as part of their pitch, according to the Bloomberg report. A rollover is when an investor moves or transfers the holdings of one retirement plan to another without suffering tax consequences.

And it’s all about the fees. Company retirement accounts such as 401(k)s often have a smaller set of investments for workers to choose from than a broker-sold IRA. But the company retirement plan usually includes low cost and conservative index funds to invest in a broad array of stocks and bonds, which mitigates risk.

Broker-sold IRAs can be far riskier and much more expensive. After the rollover is completed and the client’s assets are moved to the new IRA account, brokers have been lining their pockets with high risk and high commission products such as variable annuities, real estate investment trusts and private placements, leading to a surge in complaints according to investment fraud lawyers.

“You’re going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA” says a retiree advocate in the Bloomberg report, which was written by John Hechinger.

“It’s scary,” said one AT&T retiree in the quoted in the article. Her broker had formerly worked with an investment unit of global insurance giant American International Group Inc., and the broker routinely recommended large positions in high commission variable annuities and illiquid REITs. The retiree’s account balance has fallen to $100,000 from $390,000 and the client fears she will lose her home. “There are days when I go to sleep and I can’t stop thinking about it,” she told Bloomberg.

The stakes for individual investors, particularly Baby Boomers in or approaching retirement, are huge. Those boomers are facing the persistent and daunting question of what to do with their retirement nest eggs. Billions of dollars are at stake, and Wall Street banks and investment houses understand investors’ anxiety and are laser focused on capturing money in retirement accounts.

“The complaints against the brokers illustrate the underside of America’s retirement rollover boom,” Hechinger wrote. “Former employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012, up about 60% in a decade. As a result, IRAs hold $6.5 trillion, more than the $5.9 trillion in 401(k)-style accounts.”

Even the feds are looking at the issue. The U.S. Government Accountability Office is focused on “conflicts of interest” by hustling brokers, the Labor Department is proposing a “fiduciary duty” rule for financial advisors and FINRA, the securities industry’s self-regulator, is warning firms that it is scrutinizing IRA rollovers.

“Last year, the GAO found that a conflict of interest was fueling IRA growth,” according to the article. “Financial companies that administer 401(k) plans misled GAO investigators posing as departing employees, telling them they would almost always be better off if they shifted to IRAs that the companies also managed.”

In typical scenarios, Merrill Lynch and E*TRADE are offering investors $600 to roll over a 401(k) into an IRA. This reminds me of banks giving out toasters to customers who open high fee minimum balance checking accounts.

“If someone offers you $600 to roll over your IRA, you can be sure you are going to be paying a lot more additional expenses later,” one professor and mutual fund advocate told Bloomberg.

Watch out rollover customers. If a broker comes running along shouting about the wonders of moving your company 401(k) into an IRA he is selling you, simply cross the street. That way, you can avoid being steamrolled by Wall Street.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.