As you prepare for retirement, one of the toughest financial decisions you’ll face is what to do with your workplace savings plan and your pension (if you’re fortunate enough to have one). You need your hard-earned nest egg to support a long retirement. And while many reputable financial professionals are at the ready with good advice, another breed of advisers is poised to prey on you with rollover recommendations that range from self-serving to fraudulent.
In the first part of this story, MONEY outlined four ways bad rollover advice could jeopardize your retirement security. The potential pitfalls include paying too much in fees when you trade one variable annuity for another to retiring early and withdrawing your money too fast to making foolhardy investment bets with your IRA.
Of course, you aren’t looking for trouble when you go to roll your retirement plan into an individual retirement account or other product. But trouble can find you in one of many ways.
You go to work: Many cases of bad rollover advice start at the office, where financial pros have or can easily get a foot in the door. Investment companies manage your retirement funds. And according to Aon Hewitt, 75% of employers host retirement workshops or seminars.
Between 2004 and 2011 two MetLife brokers persuaded dozens of State University of New York workers to buy new variable annuities—sometimes more than once—resulting in costly surrender charges and lost death benefits. MetLife was one of four authorized investment providers for SUNY’s retirement savings plan, and Patrick Chapin and Christopher Birli had been assigned to work with employees with MetLife investments.
The men orchestrated a double transfer, rolling the MetLife annuities first into a TIAA-CREF VA and then into a new MetLife VA, according to an action by the Financial Industry Regulatory Authority (FINRA). In July the brokers agreed to a permanent ban from the brokerage industry. MetLife, which had fired the pair, took steps to make the retirees whole. In a statement, the company said it “is committed to the highest standards of customer service.” Lawyers for both brokers declined to comment.
Drug Enforcement Agency, FBI, and other federal workers didn’t fare as well after an adviser brought in to run retirement seminars persuaded them to move their savings into a bond fund paying a guaranteed 8% to 10% a year. Unfortunately, Wayne McLeod, who conducted sessions for the government for two decades, earning as much as $15,000 a meeting, was running a $34 million Ponzi scheme. McLeod committed suicide four years ago, soon after his scheme came to light.
A group of 94 McLeod clients, some of whom lost more than $200,000, sued the government last year, claiming that officials didn’t properly vet McLeod. The DEA and the General Services Administration, which approves contractors, declined to comment.
You chat with a broker in the halls: A rep from the firm that runs your retirement plan might lead an educational session. But it could just as easily be an outside financial planner who has offered to give a free seminar in the cafeteria or a conference room in the hopes of landing new business.
That adviser may be decked out with impressive-sounding credentials: The Consumer Financial Protection Bureau has counted more than 50 designations that suggest expertise with seniors, yet some require little more than a check and a multiple-choice exam.
This is where the laws designed to protect you from bad advice get a bit murky. As the sponsor of your retirement plan, your employer is required to act in your best interest (as what’s called a fiduciary). That includes vetting the experts it hires.
However, an adviser offering a free seminar probably works on commission and is therefore subject to a less stringent standard for what he or she can recommend. “The law is so complex, it’s ridiculous,” says Marcia Wagner, a Boston lawyer specializing in retirement law.
And any veneer of credibility bestowed by your employer can make you more vulnerable, says AARP fraud expert Doug Shadel. “You think, ‘Well, they must be okay,’ and don’t ask as many questions,” he says. Consumer advocates have long complained that this awkward arrangement leads to abuses. While the Department of Labor has tried to change the rules, the industry has argued that advisers wouldn’t come in altogether if they weren’t allowed to market rollovers.
You register your warranty: Outside work there’s a cottage industry that helps advisers find hot prospects, using the personal information data brokers collect.
Mike Newton, owner of AccurateLeads in Buford, Ga., says one of his company’s most popular lists is “64 turning 65.” Typically, the leads are based on your address and “self-reported” age, such as what you wrote down when you signed up for a service like a warranty. This is cross-referenced with property records and your zip code to estimate the value of your house and guess your net worth.
A list like that goes for $40 or $50 per 1,000 names, says Newton. You become a far more valuable lead if you, say, go to an insurance website and fill in information to learn more about a particular product.
You enjoy lunch out: Once an adviser gets a hook into you, next may be an invitation to a free lunch or educational seminar on Social Security or retirement investing strategies. In one flier from Illinois adviser Dick Van Dyke, he pledges to explain how you can “potentially extract hundreds of thousands, if not millions of dollars out of your IRA or other qualified retirement plan … with little to NO Tax.”
Last April, after the state securities department found he had moved retirees into index annuities, then cashed them out and bought new ones, Van Dyke was prohibited from selling securities in Illinois. He faces more than $350,000 in fines and costs. He is appealing the order, arguing that he explained the terms of the annuities properly; his fine has been stayed pending his appeal, which will be heard in late October.
Free meals have long been a hotbed of bad advice. “The most important thing to remember is that whoever is offering the seminar has a financial incentive to do so,” says Gerri Walsh, head of investor education at FINRA.
When FINRA surveyed a group of investors age 40 and over two years ago, 32% reported having gone to a lunch that turned out to be a sales pitch. In 2007 securities regulators checked up on more than 100 free-meal seminars in retiree-rich areas like Florida. Half the time sales materials contained claims that appeared to be exaggerated, misleading, or unwarranted (“Immediately add $100,000 to your net worth”). In 13% of cases, the claims looked to be fraudulent. That free lunch can prove costly indeed.
How to Protect Yourself
To make sure you don’t fall prey to potentially disastrous advice no matter where you come across it, be skeptical of tantalizing claims and take these steps.
Question rosy assumptions. A projection that relies on investment returns over 10% is a red flag, says FINRA. Same goes for a 7%-plus withdrawal rate. A 4% withdrawal rate is the highest that most experts recommend.
Leave tax planning to a CPA. IRA withdrawals can have tax consequences the adviser may gloss over, especially if you are retiring before age 59 1/2, the normal age for penalty-free withdrawals.
Know what you’re paying. That includes commissions and investment costs. If you’re set on a variable annuity, aim to pay no more than 1.5% of assets a year. And if you are switching from one variable annuity to another, find out if surrender charges apply—those can run as high 7% of your investment.
Don’t put too much faith in initials. At finra.org, you can look up requirements for any adviser designation.
Watch for odd behavior. The MetLife brokers corresponded with customers from their personal email—an industry no-no.
Vet the pro. Look for complaints and disciplinary actions at brokercheck.finra.org. Another red flag is a history of firm hopping, as McLeod, the Ponzi-scheme operator, did. Notes Andrea Seidt, Ohio’s securities commissioner: “That suggests there could be repeat issues where the broker is encouraged to move on or leaves because he senses the firm is onto him.”