Beware of Brokerage Firms Soliciting 401(k) Rollovers – Part II

shutterstock_189006551This article picks up on our prior post concerning a recent report by Bloomberg concerning allegations that brokerage firms have used unscrupulous tactics in rolling over employee 401(k) plans into IRA accounts.

The article highlighted how Kathleen Tarr (Tarr) and Richard McCollam (McCollam) with Royal Alliance Associates gained access to AT&T Inc. employees. Tarr was also associated with SII Investment, Inc., from July 2010 until November 2012. McCollam began marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments. The telecommunications company has 246,000 workers and ranks among the best 15 percent of U.S. plans in terms of fees, charging expenses as low as .01 percent. At AT&T employees can take a pension monthly payment or a lump sum payment.

According to the article the employees looked to Tarr as 401(k) expert and visited their homes and offices in order to advise them on their retirement plans. Bloomberg found that Tarr encouraged hundreds of departing AT&T employees to roll over their retirement savings into risky high-commission investments that the SEC and FINRA have warned customers against investing substantial unsuitable sums into.

According to Bloomberg McCollam handled the back office while Kathleen Tarr prospected for clients. Bloomberg reported that McCollam recommended that clients put 60 percent to 70 percent of their money in variable annuities with the rest in non-traded REITs, including Inland American Real Estate.

However, investing in a variable annuity within an IRA makes no sense for most investors. IRAs are already tax deferred vehicles. One of the main benefits of a variable annuity is its tax deferment. However, a variable annuity in an IRA provides no additional tax savings. Moreover, annuities increase costs and generate fees and commissions for the broker over the cost of simply investing in mutual funds outside of the annuity. According to Bloomberg, McCollam, Tarr, and Royal Alliance would generally receive commissions of as much as 6 percent or 7 percent of the money that clients invested in variable annuities. In addition, the mutual funds selected would charge customers 2 percent to 3 percent a year in fees. Compared to AT&Ts .01 percent fee it is difficult to imagine how customers are benefiting from these rollovers.

The two brokers signed up as many as 500 customers and oversaw some $90 million in investments. Their business generated between $600,000 to $700,000 in annual commissions and $1 million in its best year. In 2010, Royal Alliance terminated Tarr and McCollam, stating that they failed to follow a policy for pre-approval of variable annuities.

According to Tarr’s brokercheck, she has had 37 customer complaints filed against her and one termination. The vast majority of the complaints relate to unsuitable recommendations of variable annuities, non-traded real estate investment trusts (REITs). One former Tarr client, a former AT&T administrative assistant, watched her account balance fall to $100,000 from $390,000. The customer now fears she will lose her home and cannot pay for certain home repairs because it will strain her budget. According to Bloomberg, Tarr and her business partner reaped hundreds of thousands of dollars a year in commissions and trips to the Bahamas and Florida resorts for recommending these investments. Despite the fact, that virtually all of these retirees were allegedly invested in the same risky products Tarr and Royal Alliance continue to claim that the investment choices were appropriate.

To be continued in Part III.

The attorneys at Gana LLP are experienced in representing investors concerning unsuitable variable annuities, REITs, and other investments to recover their losses. Our consultations are free of charge and the firm is only compensated if you recover.