Retirement Scams

It’s sickening how far Wall Street will go to line its pockets with the money of unsuspecting Americans. I would call this latest revelation a scandal, except it’s hardly making headlines — even though it involves fraud.

The story involves rolling over 401(k) accounts into IRAs.

As a long-term income/dividend investor, I love IRA accounts, especially the Roth variety. They are powerful tools that allow the individual investor to avoid taxes as they invest for retirement.

And Wall Street has found a way to pervert them for its own gain.

You probably know that when you change jobs or retire, you have the option to roll your 401(k) account into an IRA. It’s usually a good idea because you can get your money into an account that avoids certain taxes and also offers you a much better assortment of investment choices.

For instance, most 401(k) plans only offer you mutual and index funds, while you can buy individual stocks in IRA accounts.

But you can also gain access to a lot of non-stock investments that may have higher fees and not be as easy to buy or sell.

This is where the problems start.

Bloomberg recently told the story of a few people who rolled their 401(k) accounts into managed IRAs and got totally shafted.

One such investor, Manuel Gonzalez Martinez, put his $150,000 nest egg in Puerto Rican municipal bonds on the advice of his broker. These bonds had a 3% upfront sales fee and annual fees of 1% a year.

In one year, that’s $6,000 in fees. Outrageous. And it gets worse.

Puerto Rico’s economy tanked after the financial crisis. Now those bonds are worth only $90,000. Throw in all the fees, and Manuel’s retirement savings have been devastated by more than $50,000 in losses.

Know Your Investments: Non-Traded REITs

Another investor, Maria Lew, watched her IRA account balance fall from $390,000 to $100,000 after some of her money was put into non-traded REITs.

I love REITs as a dividend investment. And my Wealth Advisory income newsletter has seen some excellent returns from top-quality REITs. But you should know that even though they may sound similar, there are some big differences between a regular REIT and a non-traded REIT.

A non-traded REIT is a real estate investment trust (REIT) that doesn’t trade on a stock exchange like the New York Stock Exchange or the Nasdaq. Because of this, it can be very hard to sell your shares when the price starts dropping.

Not only that, but non-traded REITs can carry a huge 10% commission right off the top. Of that, 7% goes to the broker that recommends them.

Also, non-traded REITs don’t have to report estimated per-share value until 18 months after they are done raising funds. The fund raising might take two or three years. In other words, it could be years before an investor in a non-traded REIT has any idea what the REIT is actually worth.

How is this even legal?

If you ever have a broker suggest a non-traded REIT to you, you can be pretty sure he or she is ripping you off.

In 2013, broker-dealers sold $20 billion in non-traded REITs. That’s $1.4 billion in commissions that came out of some people’s retirement savings and went right into brokers’ pockets. I’d call it a $1.4 billion rip-off.

Legal Robbery

Bloomberg also told the story of how nine investors lost over $1 million after rolling over their 401(k) plans. This time, their broker put their retirement savings into highly risky ventures like oil and gas private placements.

Another popular retirement scam to separate individual retirement investors from their money is variable annuities.

Now, many retirees understand that an annuity provides insured income. A variable annuity preys on the perception of the safety in a regular annuity, and at the same time, it offers upside potential. A variable annuity invests like a mutual fund, so your income is variable as to whether the stocks go up or down.

The insurance component of the variable annuity usually assures you that you’ll receive at least your principle back if you die — but that may be it. The problem with variable annuities is fees. There’s a 7%-8% up-front commission, and annual fees can run 3% a year. Plus, the insurance component can take another 1% a year.

Variable annuities exist to generate fees for the broker and the sponsor company.

Non-traded REITs, Puerto Rican muni bonds, oil and gas private placements, variable annuities — none of these investments has any business being in your retirement account. They are all much more risky than they sound and carry high fees and even commissions to the broker that sells them to you.

So why are they pushed so hard on unsuspecting investors? It’s mainly because, from a legal perspective, the broker is not held to a fiduciary standard — that is, his is not required to put his clients’ interest above his own.

Normally, if you have money in a trust, for instance, the trustee is required by law to uphold his or her fiduciary duty — to put your interest above his or her own. Brokers aren’t held to that reasonable standard.

Surprised? Well, brokers are only required to sell products that are suitable for clients. The standard for what is suitable seems to be whether they can afford the particular investment product — and the fees and commissions.

All About the Money

In 2010, the Dodd-Frank financial regulation law gave the SEC the authority to propose a rule requiring brokers to act as fiduciaries. The SEC has done nothing.

The Department of Labor, which oversees retirement plans, has yet to act on the fiduciary issue, either. It was supposed to have a proposal out in August, but it recently pushed the date to January 2015. The Labor Department had already proposed a fiduciary standard in 2010 but then withdrew it in 2012 after Wall Street protested.

The Securities Industry and Financial Markets Association (SIFMA) is one of the financial industry’s main groups working against a fiduciary rule for brokers.

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said: “From day one, [the fiduciary rule proposal] has been a troubled proposal by DOL that will harm the ability of everyday American investors and small business owners to save for retirement.”

The Insured Retirement Institute (IRI) is another.

IRI President and CEO Cathy Weatherford said, “IRI continues to be concerned that a forthcoming [fiduciary] rule proposal from the DOL could have unintended consequences that would ultimately deprive lower and middle-income Americans from accessing affordable retirement planning services and advice.”

Wall Street is spending millions lobbying Congress to kill this fiduciary rule. Their message is clear: American investors need to be gouged by unscrupulous brokers in order to save for retirement.

My message should be clear too: be aware that Wall Street is targeting your retirement savings. Be aware that they want to trap you in bad investments with high fees and commissions.

And be aware that it is perfectly legal for them to do so.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.