Net Gains: Beware Early Retirement Scams

April 30, 2008 — -- Retire early, cash out your retirement plans and live off 12 percent annual returns.

If there's a financial advisor pitching this scenario to you, I have just one recommendation: Run away — fast.

Securities regulators are offering the same advice in the wake of at least two schemes targeting longtime employees of two major corporations. In both cases, brokers used unrealistic investment projections to convince the workers they could retire comfortably while still in their 50s.

These scams allowed the perpetrators to earn investment fees and commissions on millions of dollars that otherwise would have been locked up in company retirement plans. In some cases, the participating brokers persuaded the workers to surrender a guaranteed monthly pension benefit and instead collect a single lump-sum payment.

The Financial Industry Regulatory Authority (FINRA) says that additional cases are now under investigation.

The agency last week launched an effort to educate both employers and workers to be on the lookout for early retirement schemes "that promise more they can deliver."

FINRA published two online brochures — one for employers, one for workers — that offer suggestions on spotting retirement schemes. Both brochures are available on the investor information section of the FINRA Web site, www.finra.org.

"Companies don't want to unwittingly help scamsters lure their employees into cashing in their retirement investments early with misleading promises of big financial returns — and comfortable retirement lifestyle — that simply can't be sustained," FINRA chief executive Mary L. Schapiro said in launching the effort.

FINRA is an industry self-regulatory agency that oversees securities firms and brokers. It was created last year from the merger of the regulatory arms of the New York Stock Exchange and the National Association of Securities Dealers.

FINRA advises employers to check out the backgrounds of advisers offering retirement seminars to their employees, review seminar materials and confirm advisers have their firms' permission to offer such events. FINRA also is offering to review seminar materials brought to them by skeptical employers.

The brochure for workers advises them to be wary of "free lunch" seminars and pitches based on "little-known loopholes," understand the tax implications of early retirement and know the details of company retirement plans.

The warning also advises people to be skeptical of claims a worker can earn as much money in retirement as while employed. "Promises like this usually hinge on unrealistically high returns on investments and unsustainably large yearly withdrawals," says the brochure "Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams."

The National Association of Securities Dealers first warned workers to be on the alert for fraudulent early retirement pitches in 2006 when it brought action against Securities America Inc. of Omaha, Neb., and against Baton Rouge, La., broker David McFadden.

Both firms eventually agreed to settle, although neither one denied or admitted the allegations.

McFadden's seminar campaign cost 32 former Exxon employees more than $11 million, according to FINRA.

The authority fined Securities America $2.5 million and ordered it to pay $13.8 million in restitution to the former Exxon employees McFadden had convinced to retire early, take lump-sum pension payouts and invest those funds — plus 401(k) balances ——- with him. The National Association of Securities Dealers brought separate fraud charges against McFadden.

Then last year, the association announced a $15 settlement with Citigroup Capital Markets Inc., Smith Barney's parent company. That settlement included $12.2 million in restitution to more than 200 former BellSouth employees.

In that case, a team of Smith Barney brokers in Charlotte, N.C., preyed on BellSouth employees from 1994 to 2002 with seminars that told them to expect annual investment returns of at least 12 percent. The Smith Barney team also told BellSouth workers in their mid-50s that they could safely withdraw 9 percent of their portfolio annually without depleting their nest eggs.

The Smith Barney brokers convinced BellSouth employees to not only transfer their 401(k) accounts but to also exchange the promise of a guaranteed monthly pension benefit for a lump-sum payout that would be managed by the brokers.

Most of these employees were "unsophisticated investors" in their mid-50s with retirement savings of less than $350,000, according to FINRA.

The broker campaign involved misleading sales materials during more than 40 seminars for BellSouth employees. One document projected a hypothetical 53-year-old BellSouth employee with $300,000 to invest could earn more than $1.8 million, withdraw up to $69,000 a year and still have more than $770,000 remaining after 30 years.

Instead, the BellSouth employees sustained heavy stock market losses and their retirement savings neared depletion.

The lead Smith Barney broker, Jeffrey Sweitzer, assured one couple they should be able to expect annual returns of at least 12 percent, according to FINRA.

"The brokers' materials also failed to adequately disclose that the customers would pay fees of two to three percent, requiring them to earn 14 to 15 percent annually to achieve the expected 12-percent return," NASD noted.

Keep these facts in mind if somebody says you can retire in your 50s if you invest with them. In fact, you might want to run as fast as you can.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com