Abuse and Misuse of Access to Participants

Plan sponsor must be aware of extent/nature of employee access granted to investment brokers/firms

Although the vast majority of investment professionals are ethical and honest, as long as there are investors, there will be some unscrupulous investment professionals waiting to defraud them. Fraud by brokers and other financial and investment “experts” is nothing new. However, as baby boomers near retirement age, the hundreds of billions of dollars in assets to be distributed from retirement plans in the coming years will provide a new and tempting target for the most opportunistic among them. 

Because of the trend toward targeting employees at or near retirement age, plan sponsors and fiduciaries need to be wary of any individual or organization wanting to offer “free” investment or retirement planning seminars to their employees. These seminars give brokers and other investment salespersons access to employees who will soon be entitled to large lump sums of cash. The obvious danger is that an unscrupulous salesperson will use the seminar or a one-on-one “counseling” session to sell the participant an inappropriate, expensive, or even non-existent investment product. 

Even worse, the salesperson may convince the participant to retire early in order to cash out retirement benefits on the theory that investing through the broker will allow the participant to live in style for the rest of his life and still leave money to his children. Responding to this type of sales pitch can cost the participant the additional retirement benefits he would have earned by continuing to work, as well as exposing the participant to the risk of loss through bad investments. The problem is common enough that the NASD, the securities industries self-regulatory body, issued an Investor Alert on the problem, Look Before You Leave: Don’t Be Misled By Early Retirement Investment Pitches That Promise Too Much, which is available from the NASD Web site at: www.nasd.com. 

A recent settlement between the NASD and CitiGroup illustrates the potential cost to participants. CitiGroup will pay over $15 million to settle allegations that its representatives used misleading materials in free retirement planning seminars provided to the employees of BellSouth. The NASD alleged that CitiGroup failed to supervise its local brokers, who used misleading materials to convince BellSouth employees to take early retirement, cash out their pensions and 401(k) accounts, and invest the proceeds with the brokers. More than 200 BellSouth employees were affected. As a result, the NASD ordered CitiGroup to pay $12.2 million in restitution to the former BellSouth employees and an additional $3 million in fines. It also suspended the licenses of the individual brokers for periods ranging from 30 days to 18 months and ordered them to complete continuing education courses and pay a total of $295,000 in fines. 

The CitiGroup case illustrates the fact that the distribution of baby boomer retirement assets from qualified plans is causing investment firms to become even more aggressive in their pursuit of retirees. Managing the assets of rollover IRAs is a growth industry and will continue to be one for the foreseeable future. Investment firms and brokers are approaching employees and retirees on an individual basis through banks and insurance brokers and as a group through the workplace. 

Obviously plan sponsors cannot and should not try to regulate how their employees choose to invest their assets outside the retirement plan context. However, the plan sponsor must be aware of the extent and nature of the access it grants investment brokers and firms to its employees. Participants approaching retirement certainly need education and information concerning their distribution options. However, as in the CitiGroup case, some individuals providing such education and information may see a seminar as an opportunity for a hard sell to push participants into early retirement, cashing out plan benefits, and making risky investments. 

This concern becomes more pronounced when, as is often the case, a recordkeeper insists that its service agreement give representatives of an affiliated investment firm unrestricted access to provide participants nearing retirement with “free” education about rollover and distribution options. Although there are valid reasons for a plan sponsor to agree to such a provision, the plan sponsor needs to be sure that the materials provided by brokers or other salespersons at meetings are accurate, that they are approved for general use for this purpose by the recordkeeper, that the recordkeeper is responsible for the education and information provided, and that participants are informed that there are other investment representatives and products for them to consider.