The pitch: Retire early. The catch: Shady brokers
HOUMA, La. -- After 30 years of toiling in oil fields, Ray Lirette was told in 1997 that he could retire at 52 and buy a camper so he and his wife could travel across the USA.
Lirette says he trusted the advice because it came from an investment broker used by other Chevron workers. That's why he turned over his retirement savings — $335,000 — to the broker to manage, bought a camper and truck, then borrowed against a nearly paid-off mortgage to pay off credit card bills and auto loans.
"He showed me this projection that I'd have $1.3 million in 10 years," Lirette, 63, said as the sun glinted off the 28-foot camper parked on his lawn. "I thought, 'I guess we can retire.' "
Retirement didn't last long. Lirette says his nest egg shrank to $43,000 over eight years as his portfolio — concentrated in fairly risky stocks — plunged. The broker, he says, still guaranteed returns of 15% and said the market would rebound. About five years ago, Lirette and his wife were forced back to work, into jobs paying a fraction of what they used to earn.
It's a nightmarish lesson in investing that regulators say will become increasingly common as 79 million baby boomers inch toward retirement. Across America, a growing number of financial advisers are targeting the portfolios of the swelling number of want-to-be early retirees through their employers. Advisers are crashing company retirement parties, holding seminars in the workplace — sometimes with little oversight by employers — and persuading employees to pass along their co-workers' contact information.
From one case to the next, the pitches are similar: Employees are urged to retire early by brokers who claim they can earn them more money in retirement than they could make if they continued working. The employees are told they can withdraw up to 9% of their nest eggs a year in retirement because their portfolios — often invested in high-cost, high-commission products — will gain 15% or more a year. In many cases, they're persuaded to do so because some co-workers have done the same.
"It's like Groundhog Day— different broker but the same exact case," says Joe Peiffer, a New Orleans lawyer who's represented early retirees in dozens of arbitration complaints against brokers and financial firms. "This is an irresistible source of income to brokers. If they can get into a big company where everybody has a lot of money, they can make a lot of money."
Regulators are starting to pay closer attention. The Financial Industry Regulatory Authority (FINRA), a self-policing body for brokers, has begun a "sweep" of 16 brokerage houses' sales materials and seminars related to early retirement. During the past year, it's ordered two firms to pay more than $30 million in fines and restitution for allegedly letting their brokers entice telecom and oil company employees to retire early with promises of exaggerated investment returns.
As advisers have become more aggressive about targeting retiring workers, some employers have begun to raise questions about their duty to protect workers — and their potential liability if they don't.
"How money will be managed after employees retire is an emerging topic of conversation in the employer community," says David Wray, president of the Profit Sharing/401(k) Council of America, which represents companies that offer 401(k) plans. "If there's an employer endorsement and it's in the context of a (retirement) plan, there could be some liability. Employers who are thinking about this are being very careful."
Many of the brokers' pitches hinge on a tax rule that lets investors avoid the 10% penalty imposed on retirement-plan withdrawals made before they turn 59½. Under this rule, early withdrawals incur no penalty as long as investors take "substantially equal periodic" payments. This rule can benefit those with sizable assets who retire early. But it's risky when your retirement years can exceed your working years.
Many baby boomers — those born from 1946 through 1964 — are approaching retirement with hundreds of thousands — even millions — of dollars built up in their retirement accounts. Those assets make them alluring targets for financial advisers, some of whom pitch inappropriate, and sometimes non-existent, investments.
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