It has emerged that the 401(k) rollover boom is enriching the brokers at the expense of the retirees. A broker like Kathleen Tarr and her business partner is said to have earned hundreds of thousands of dollars in commissions.
Tarr was working for a brokerage firm owned by American International Group Inc called Royal Alliance Associates. She encouraged employees who were leaving AT&T to roll over their retirement cash into risky yet high-commission investments. Interestingly, Wall Street’s self-regulatory agency has warned against this practice on its website. Tarr herself says the employees of AT&T Inc (T) looked to her as a 401-k expert.
According to Financial Industry Regulatory Authority records, not all of Tarr’s clients fared well and 37 of them have already filed complaints against her. But Tarrr and Royal Alliance insist the investment choices were appropriate.
Under the AT&T plan, Tarr’s clients would have paid lower fees than what they paid in their brokerage accounts. But it is not easy to know how they would have faired if they left their investments with AT&T since the employees in AT&Ts and 401-k plans also faced great losses during the 2008 financial crisis. The market has since rebounded and is currently doing well. Tarr stands by her advice, maintaining that the investments did well in that difficult market. She says all she wanted to do was the best for her clients.
Maria Lew’s account has fallen from $390,000 to $100,000. She worked at AT&T as an administrative assistant and was Tarr’s client. She fears that she might lose her home and the leak in her kitchen is giving her sleepless nights as it will strain her budget to fix.
The complaints against brokers made former employees to shift up to $321 billion from 401(k)-style plans to other retirement accounts like IRAs in 2012. According to Cerulli Associates which is a Boston-based consulting and research firm, this is up by almost 60 percent in ten years. It has resulted in IRA holding $6.5 trillion compared to $5.9 that is still held in 401-k- style accounts.
Former employees at major companies such as United Parcel Service Inc Palo Alto, Hewlett-Packard Co. and AT&T complained that they are being enticed to roll over their 401-k boom into inappropriate IRA investments by sales representatives.
While the retirees are free to leave their savings in 401-k plans, financial firms lure them with storefront signs, cash incentives, cold calls and Internet ads to switch to IRAs. They claim the IRAs offer variety of investment choices not offered by the typical 401(k) plan. Well, that’s quite appealing, but it can also be a pitfall as retirees are offered expensive and high-risk investments.
IRAs also charge higher fees than the 401-k plans, and that is why brokers promote them.
To protect investors, the U.S. Labor Department had said it would propose rules that would require brokers and other advisers to act in the interest of clients during rollovers. FINRA also warned members it would heighten its scrutiny of IRA rollovers. But the Financial Markets and the Securities Industry are opposed to stricter regulation claiming it would hurt commission-based brokers. They said disclosure rules are sufficient to protect customers.