(In penultimate paragraph, corrects John Gentile's title from
president to partner.)
By Suzanne Barlyn
Jan 9 Brokers who give retiring workers bad
advice about what to do with their 401(k) plans should expect
some headaches: U.S. securities regulators are taking a closer
look at what happens when investors roll their workplace
balances into private individual retirement accounts.
The Financial Industry Regulatory Authority and the U.S.
Securities and Exchange Commission are reviewing firms'
practices for advising customers about so-called rollovers. The
SEC said on Thursday that the issue is one of its 2014
examination priorities, after FINRA announced its own plans on
Brokers should recommend a rollover only after thinking
about several factors for the investor, such as low-cost funds
available through some 401(k) plans and differences in fees
between the two types of accounts, FINRA said.
Violations can lead to fines, suspensions or being thrown
out of the industry.
FINRA's announcement marked the second time in less than a
week that the regulator sounded an alarm bell about retirement
plan rollovers. It also published guidance to the industry on
The regulators' concerns come as retirement plan rollover
practices are being subjected to greater public scrutiny.
Americans have roughly $21.7 trillion in retirement accounts,
according to the Investment Company Institute. That covers all
types of retirement accounts, including $5.6 trillion in
employer-sponsored retirement plans, assets that could be
lucrative for brokers who convince clients to invest them in
securities through an IRA.
A report last year by the U.S. Government Accountability
Office concluded that the financial industry generally
encourages employees to roll over their 401(k) assets into IRAs
without determining whether the move is in an investor's best
Brokers are not the only ones facing scrutiny on these
issues. Most major financial companies manage 401(k) plans for
employers and often offer advice to employees about the
particulars of their plans.
The U.S. Department of Labor is also developing a rule that
would establish more stringent ethical responsibilities for
advisers who counsel workers on rollovers.
"This area is an area where disclosure, the quality of
advertising and supervision of the investments that are made, is
absolutely critical," Richard Ketchum, FINRA's chairman and
chief executive, said in an interview. "We've seen evidence in
which they're not always handled well," he said.
Among the problems: promoting so-called "no-fee" IRAs to
investors, a practice FINRA warned the securities industry about
in July, 2013. The term could mislead investors, who typically
pay fees in some way to maintain an account, FINRA said. For
example, the costs of a "no-fee" account may be disguised in a
higher commission instead of highlighted as a separate charge.
Nonetheless, the advertising strategy could lure investors into
a rollover that may ultimately be more costly than staying in
their employers' plans.
FINRA has not yet pursued any enforcement cases involving
retirement plan rollovers, a spokeswoman said.
FINRA's interest in rollover practices coincides with
efforts by some investors to recoup money they say they're owed
because of a broker's rollover advice that was not suitable for
One case, on behalf of six retirees of the former Niagara
Mohawk Power Corp, now a part of National Grid USA, a
subsidiary of National Grid Plc, alleges that an
ex-broker for LPL Financial LLC advised them to cash in
their pensions when they retired and roll the money over into
investments that he would manage, according to Joseph Peiffer, a
lawyer in New Orleans who is handling the case.
The retirees, who transferred their funds between 2007 and
2009, collectively lost "millions" of dollars when they might
instead have locked in monthly pension payments for life,
Peiffer said. LPL settled a similar previous case for $390,000,
according to a regulatory filing. An LPL spokeswoman declined to
comment. A National Grid spokesperson was not immediately
available to comment.
The former broker, Jeffrey Cashmore, now runs an investment
advisory firm in Williamsville, New York. He said he was unaware
of the present case but that he counseled Niagara Mohawk
retirees about staying in their plan.
FINRA suspended Cashmore for 30 days in 2012 and fined him
$5,000 for allegedly providing misleading materials to
customers. Cashmore denied misleading clients and settled with
FINRA because he thought the terms would be confidential, he
said, adding that he still advises many Niagara Mohawk retirees.
The vast majority of workers are allowed to leave their
money in a 401(k) even when they leave a company. It's often a
cheaper alternative, but one that many workers don't know is
available to them.
It is one point that FINRA wants brokers and their firms to
get across. Brokers can stay out of trouble by making sure that
investors are well-educated about their choices before they roll
over their retirement plan money, as well as additional fees a
rollover may cost, say lawyers and compliance professionals.
Some of the largest brokerages automate disclosures about
those choices in the online system investors use to set up a
rollover. At Bank of America's Merrill Lynch unit, for
example, one disclosure advises investors who are leaving one
company for another to consider the new company's plan.
Many smaller firms, however, will have to beef up their
disclosure practices, said John Gentile, a partner with
Ascendant Compliance Management in Salisbury, Connecticut. All
firms will have to train advisers to ensure the conversations
they have with clients are consistent with the firm's
disclosures and FINRA's expectations, Gentile said.
FINRA can easily check up on brokers who promise clients
more fund choices than their company plans, or funds with lower
fees, Gentile said. "They will get out the prospectus for each
and compare," Gentile said. "Brokers have to be totally up
(Reporting by Suzanne Barlyn; Editing by Linda Stern and Dan