Retirees Hurt, Brokers Enriched by $300 Billion 401(k) Rollover Boom

According to, as 401(k) rollovers continue to boom, it is the brokers who are profiting while the retirees are sustaining losses. Now, these investors are speaking out.

It was in 2012 that former employees moved $321 billion from 401(K) plans to individual retirement accounts-a 60% rise from the last decade. Now, the IRA is holding about $6.5 million in 401(k)-like accounts.

Even though retirees typically can keep their savings in 401(K) plans, financial firm reps. do reach out to try and persuade them to move their funds to IRAs instead. Internet ads, cold calls, cash incentives, and storefront signs are used to draw retirees in, including the promise of wider investment choices compared to their current plans. In one example of an incentive promised, E*Trade (ETFC) Financial Corp. and Bank of America Corp.’s (BAC) Merrill Lynch offer anyone who rolls over a 401 (K) plan into an IRA up to $600. (However, this can result in additional expenses down the road.)

Bloomberg, which conducted a three-month probe, discovered that ex-employees at big companies, such as AT&T, United Parcel Service Inc., and Hewlett Packard Co., have complained that sales representatives approached them to move retirement funds into unsuitable IRA investments. The investigation included interviews with brokers and retirees and an examination of documents, including confidential arbitration records.

One ex-AT & T administrative assistant who talked to Bloomberg said her account balance has dropped from $390K to $100K since she made such a transfer. Now, she is worried about losing her home.

The woman was a client of Kathleen Tarr, then a Royal Alliance Associates broker. American International Group Inc. (AIG) owns that firm. Tarr visited the offices and homes of AT & T employees, encouraging them roll over their retirement money into high risk commission vehicles.

She and her business partner reportedly made hundreds of thousands of dollars in commission annually. Since then 37 of her clients have filed complaints naming her. Tarr and Royal Alliance maintain that they made the right recommendations to retirees.

In the last couple of years, federal regulators have been cracking down on rollover abuse. In 2013, the US Government Accountability Office discovered that conflict of interest was a reason for IRA growth. Congress’s investigative arm said that financial companies that issue 401(K) plans even misled government investigators that pretended to be employees who were retiring. Representatives from these companies told the individuals that they should move their funds to IRAs that their firms managed.

Municipal bonds and non-traded real estate investment trusts are among the risky investments that retirees got involved in because of such recommendations. When Puerto Rico’s municipal bonds tanked badly last year, retirees who entrusted brokerage firms such as UBS (UBS) to move their funds into an IRA suffered huge losses to their life savings.

As for non-traded REITs, FINRA has already issued an alert warning that these instruments are difficult to cash in, aren’t as diversified as other real estate investments, and can come with commissions and other costs.

Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers, Bloomberg, June 17, 2014

Public Non-Traded REITs-Perform a Careful Review Before Investing, FINRA
Government Accountability Office

More Blog Posts:
Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case, Stockbroker Fraud Blog, June 11, 2014

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head, Institutional Investor Securities Blog, June 12, 2014
JPMorgan Investment Management’s Shareholders Claim The Firm Charged Excessive Mutual Fund Fees, Institutional Investor Securities Blog, June 13, 2014