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The Only Thing Worse Than a Nearly Empty Nest Egg Is a Ripped-Off One

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If you thought the Consumer Financial Protection Bureau had its hands full remedying the victims of mortgage abuse, guess what's probably next? Once the stock market starts sizzling again and Boomers may be deluded into thinking they can retire, there's not much that will stop a broker or insurance salesperson from turning their inadequate 401(k) balance into an annuity -- and then try to sell them a new one.

Take the case of 32 Exxon Mobil employees who received advice from a broker with Securities America, a unit of Ameriprise Financial, at their workplace. Among other allegations, the group said they were directed to inappropriate investments within high-fee annuities and advised to withdraw more from their retirement accounts each year than experts say is prudent. Despite being told that they had enough money to retire early, some of the retirees had to sell their homes to pay their bills and to go back to work. In 2006 a National Association of Securities Dealers (now Financial Industry Regulatory Authority, or FINRA) arbitration panel awarded them $22 million, one of the largest awards of its kind.

Here are just a few of the numerous examples of actions taken against annuity sellers, as I pointed out in my book, America, Welcome to the Poorhouse. In 2008, Florida Governor Charlie Crist signed a law increasing fines for "twisting," in which a salesman lies about the benefits of his annuity to get clients to sell theirs from a different company, or "churning," which replaces the annuity with a new one from the same company. In 2006, then-New York Attorney General Eliot Spitzer announced that the Hartford Financial Services Group would return $16.1 million in profit from sales that were arranged in concealed agreements with brokers, increasing policy costs for customers. In 2005, New Jersey launched its Senior Citizen Investment Protection Act, which limits how long annuity sellers can impose surrender charges if the annuity owner wants to sell the product.

What's amazing is not only that the people who pull off financial abuse rarely do a perp walk -- as is also the case with crooked bank CEOs -- but that as far as I can tell no government agency requires them to post any fines/penalties on their websites or note them in handouts to prospective clients. As a result, companies that have been repeatedly fined not only have continued to generate business but some have rocketed up to Fortune 500 status.

For example, despite the fact that the FINRA report on Ameriprise showed 43 "regulatory events" between 2002 and 2010 alone requiring them to pay more than $67 million in fines, Ameriprise is ranked 288 on Fortune 500's 2010 list.

Even more astounding is Merrill Lynch: despite paying $195 million in fines since 2002 alone, its revenue growth pushed it to number 30 on the Fortune 500 in 2008 before it was acquired by Bank of America in 2009. (Spokespeople for Ameriprise and Bank of America didn't respond to my requests for comments.) While some might argue that the fines might be a reflection of the fact that even decent firms might pay major penalties for minor infractions, two other household-name brokerage firms have paid only a fraction of these fines: FINRA reports showed that TD Ameritrade has paid a total of only about $3.3 million and Scottrade has paid only about $2.5 million.

To make matters worse, while the regulatory agencies may be collecting fines many abused investors are unlikely to get their money back anytime soon. For example, while the SEC ordered more than $5.5 billion in penalties between 2002 and 2006 alone through its Fair Funds program, only a fraction of that sum, about $82 million, had been paid to investors by 2005, according to a 2006 Wall Street Journal article entitled "Harmed Investor? Just Wait." Apparently one of the reasons for the delay is that it's unclear whether the deserving recipients should be current investors or those who invested during the period of wrongdoing. Duh! Compensate the victims.

When I asked an SEC spokeswoman to explain the lag, she indicated that compensation has been ramped up since the Journal article appeared, citing a press release stating that: "In fiscal year 2010 we...distributed to injured investors nearly $2.0 billion from 42 separate Fair Funds." But she didn't explain why it should take so long to be made whole in the first place. Even more importantly, she didn't give me a reason why the SEC doesn't require everybody in the financial dis-services business to disclose their track record to potential customers. Think about it: if rich criminals were merely required to pay a fine as a punishment for any crime rather than serving time in the slammer they'd simply cough up the money and keep at it.

Allegedly "annuity abuse" shouldn't happen to your 401(k) savings at work if the Department of Labor applies its proposed rule that designates as "fiduciary" anyone who renders advice to a retirement plan participant, since fiduciaries aren't allowed to put their interests before those of their customers. Maybe, maybe not, says pension actuary James Turpin, "The good brokers will follow the rules...the unscrupulous ones will claim they didn't offer any advice, but rather just provided a product for the client to buy."

However, even if these rules prevented conflict of interest it doesn't require the most important communication that 401(k) savers need and aren't getting from their employers or from those who manage 401(k) assets. It's that if you don't have AT LEAST 10 times your salary at retirement in your 401(k) and rollover accounts you can't afford to retire and there is no product out there than can wave a magic wand and make you ready. The challenge isn't making your puny retirement savings last a lifetime -- you could do that yourself by assuming you're living to 100 and divide your money by the number of years until you reach it. The challenge is accumulating enough money to keep paying the bills you were paying before you retired, whether it's mortgage payments or loan payments for your kids' college education. If you haven't done so you need to stay in the workforce.

Bottom line: If you are among the tiny minority of people who've accumulated enough money to retire on -- most likely because you've got a regular pension as well as a 401(k) account -- a better choice for your nest egg is a managed payout account from a mutual fund company such as Vanguard. It may not generate great returns depending on the market but at least the account won't be "twisted or churned" and you won't be pinged with fees if you access your money early.