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Retirement Plan Abuses

  1. Introduction


The number of Americans who are at or nearing retirement age is growing at an unprecedented pace. According to a recent report by the U.S. Census Bureau, by 2030, almost 1 out of 5 Americans – nearly 72 million people – will be 65 years old or older and, by 2050, the United States population aged 65 years and older is expected to nearly double in size.

When these demographic statistics are combined with the fact that Americans are now living longer than at any prior point in time, it is clear that retirement assets of investors will have to last longer than ever before as well – both of which substantially magnify the importance of financial decisions for those who are at or nearing retirement.


Unfortunately, older investors, whose investment time horizons afford less time or opportunity to recover investment losses, are being disproportionately targeted by financial and investment advisors who, through misleading professional titles, self-serving purported designations of expertise and the offer of “free” investment seminars that, in reality, are nothing more than “sales” events, are all too often being exposed to products and strategies that are inappropriate and involve an unnecessary amount of risk.

If you are an older investor who has any concerns about your retirement (or non-retirement) investment accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).


  1. Common Terms Associated with Retirement Plans


IRA: An Individual Retirement Account is a form of “individual retirement plan”, provided by many financial institutions, that provides tax advantages for retirement savings in the United States. There are several types of IRAs:

Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). The maximum contribution permitted under an IRA for 2014 and 2015 is the lesser of $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year.

Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. The maximum contribution permitted under a Roth IRA for 2014 and 2015 is the lesser of $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year (although these amounts may be subject to reduction depending on your filing status and income).

SEP IRA – a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund in the company’s name. The maximum contribution permitted under a SEP IRA cannot exceed the lesser of 25% of compensation or $52,000 in 2014 and $53,000 in 2015.

Simple IRA – a Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. The maximum employee contribution permitted under a Simple IRA cannot exceed $12,000 in 2014 and $12,500 in 2015.

Rollover IRA – no real difference in tax treatment from a traditional IRA, but the funds come from a qualified plan or 403(b) account and are “rolled over” into the rollover IRA instead of contributed as cash.

Self-directed IRA is not a different type of IRA, but rather it permits the account holder to make investments on behalf of the retirement plan into a broader range of investments, typically alternative assets such as real estate, mortgages, LLCs and LPs, notes and precious metals.


401k Plan: 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Under the plan, retirement savings contributions are provided (and sometimes proportionately matched) by an employer and are deducted from the employee’s paycheck before taxation (therefore tax-deferred until withdrawn after retirement or as otherwise permitted by applicable law). The maximum pre-tax annual contribution to a 401k plan is limited to $17,500 in 2014 and $18,000 in 2015.

403b Plan: A 403b plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan in that employee salary deferrals are made before income tax is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan. The maximum annual deferral to a 403b plan cannot exceed the lesser of 100% of includable compensation or $17,500 in 2014 and $18,000 in 2015.


457 Plan: 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b)plan with the key difference being that, unlike with a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59½ (although the withdrawal is subject to ordinary income taxation). The maximum annual contribution to a 457 plan cannot exceed the lesser of 100% of includable compensation or $17,500 in 2014 and $18,000 in 2015.


Defined Benefit Plan: defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns. A defined benefit plan is “defined” in the sense that the benefit formula is defined and known in advance. When participating in a defined benefit pension plan, an employer/sponsor promises to pay the employees/members a specific benefit for life beginning at retirement. The benefit is calculated in advance using a formula based on age, earnings, and years of service. The maximum retirement benefit permitted under a defined benefit plan in 2014 and 2015 cannot exceed the lesser of 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years or $210,000.


Defined Contribution Plan: A defined contribution pension plan is a type of pension plan in which the formula for computing the employer’s and employee’s contributions is defined and known in advance, but the benefit to be paid out is not known in advance. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits which may fluctuate on the basis of investment earnings. The maximum annual contribution to a defined contribution plan cannot exceed the lesser of 100% of includable compensation or $52,000 in 2014 and $53,000 in 2015.


Lump Sum Distribution: A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). All of the participant’s accounts under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution. Additionally, a lump-sum distribution is a distribution that was paid: because of the plan participant’s death, after the participant reaches age 59½, because the participant, if an employee, separates from service, or after the participant, if a self-employed individual, becomes totally and permanently disabled. You may defer tax on all or part of a lump-sum distribution by requesting the payor to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution.


[The information contained on the preceding portion of our website is for general informational purposes only and it is not intended to be, and should not be construed as, constituting legal advice or tax advice.  Although it is based on information that we believe is current, we do not make any representation as to its accuracy or completeness]



  1. Professional Titles & Designations


Investors need to be aware of the fact that, in the securities industry, professional titles or designations are often different from the licenses that individuals are required to have in order to serve as a financial or investment advisor.


Some individuals may even use various titles or designations whether or not he or she is registered with, or licensed by, any regulatory authority as a marketing tool which is intended to imply – and mislead investors into believing – that the individual has a certain expertise or qualification.


In the context of retirement plans and “senior” issues, it is estimated that there are more than 50 different designations that are currently being used by financial and investment advisers – some of which can be acquired without any advanced training, qualifying examinations, continuing educational standards or demonstrated expertise being required – and some of which use the terms “certified” or “accredited” without any factual or legal basis to do so.


Investors must not rely solely on a title to determine whether a financial professional has the expertise that the investor may need—find out what the title means and what the financial professional did to obtain it. As with any title, you should verify a financial professional is really qualified to advise you.


Some resources that investors may want to consider in order to investigate the validity of a professional title or designation of a financial or investment advisor are:


Investor Bulletin: Making Sense of Financial Professional Titles, U.S. Securities & Exchange Commission, available at


Financial Designation and Title Search Tool, Financial Industry Regulatory Authority, Inc., available at


Protect Yourself Before You Invest: State Professional Designation Regulations, Financial Industry Regulatory Authority, Inc., available at p120759


Senior Designations for Financial Advisers, Consumer Financial Protection Bureau, available at http://files.



  1. “Free” Lunch & Dinner Seminars


Investors need to be aware of the fact that, in the securities industry, invitations to “free” lunch or dinner seminars – which are commonly referred to as “plate lickers” – are all too often a recipe for financial disaster as their primary, if not sole, purpose is to pitch financial products to prospective new clients even when the seminars are being offered by brokers at some of the largest firms.


Investors must not be misled into believing that the offer of free advice and a free meal – even when offered by a reputable firm – are, in fact, totally free of obligation.


Some resources that investors may want to consider before they accept an invitation to attend a purported “free” lunch or dinner investment seminar are:


How Troubled Brokers Cluster, Often Among Elderly Investors, The Wall Street Journal (November 12, 2014), available at


The Most Dangerous Piece of Mail You’ll Get All Year is For a Free Lunch (available at org/about-aarp/press-center/info-11-2009/free_lunch_monitor_survey.html) is an AARP publication that discusses the fact that, during the review period, nearly 6 million Americans age 55 and older attended a free lunch or dinner seminar, with mail as the most common method of solicitation (63 percent), and that while many people went to these seminars hoping to learn about ways to create a more secure retirement, they were instead pitched financial products that were fraudulent or unsuitable for them.



  1. U.S. Securities & Exchange Commission Publications


Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams (available at http://www.sec. gov/investor/alerts/earlyretirement.pdf) is a publication that will help investors avoid being misled by flawed or even fraudulent retirement pitches, particularly those that dangle the prospect of early retirement with little or no reduction in income compared to prior working years.


A Guide for Seniors: Protecting Yourself Against Investment Fraud (available at

investor/seniors/seniorsguide.pdf) is a publication that will help investors understand how scam artists work, provides descriptions of the most common types of investment fraud that target older investors and the “red flags” that are often associated with the same, discusses what all investors – and especially senior investors – need to know about professional designations and titles, and offers guidance on how to invest safely so that the potential for becoming the victim of an investment scheme is reduced.



  1. Financial Industry Regulatory Authority Publications


Look Before You Leave: Don’t Be Misled By Early Retirement Investment Pitches That Promise Too Much, Financial Industry Regulatory Authority, Inc. (available at Protect Yourself/InvestorAlerts/RetirementAccounts/ P017365), is an Investor Alert that identifies instances in which employees who had built up sizeable retirement savings have been misled, and financially harmed, by flawed, even fraudulent, early-retirement investment schemes.


The IRA Rollover: 10 Tips to Making a Sound Decision, Financial Industry Regulatory Authority, Inc. (available at, is an Investor Alert that focuses on individuals who are considering rolling over money from an employer plan into an IRA – or have been in contact with a financial professional to do so – with guidance on how to decide whether an IRA rollover is right for them.


Think Twice Before Cashing Out Your 401(k), Financial Industry Regulatory Authority, Inc. (available at, is an Investor Alert that focuses on individuals who are considering cashing in their 401k retirement plans when they change jobs and both the short-term and long-term consequences of that decision.


Smart 401(k) Investing—Moving Your 401(k), Financial Industry Regulatory Authority, Inc. (available at, is an Investor Alert that focuses on the considerations associated with the 401k retirement plans of individuals who are changing jobs or retiring.


Help Your Employees Achieve Their Retirement Dream: Tips for Spotting Early Retirement Scams, Financial Industry Regulatory Authority, Inc. (available at         P038341), is an Investor Alert that is targeted on companies that may host seminars or other meetings to educate employees about retirement planning or that may permit third party providers to conduct seminars for employees.



  1. North American Securities Administrators Association Publications


Self-Directed IRAs and the Risk of Fraud (available at is a publication that warns investors of the potential risks associated with investing through self-directed Individual Retirement Accounts, provides examples of the recent fraudulent investment schemes that utilized self-directed IRA accounts as a key feature, and offers guidance on how to invest safely so that the potential for becoming the victim of an investment scheme is reduced.


10 Tips to Protect Your Nest Egg (available at is a publication that offers the top 10 self-defense tips that can reduce or eliminate the prospect that senior investors may fall victim to investment schemes.


Senior Investor Alert: Senior Specialist Designations (available at is a publication that discusses the fact that, all too often,

individuals calling themselves “senior specialists” or other deceptive titles, create a false level of comfort among senior investors by implying a certain level of training on issues important to the elderly whereas, in reality, the training they receive is often nothing more than marketing and selling techniques targeting older investors.


Senior Investor Alert: Free Meal Seminars (available at is a publication that discusses “free” lunch or dinner investment seminars which, while enticing senior investors with invitations for free gourmet meals, tips on how to earn excellent returns on their investments and eliminate market risk, have the primary goal of obtaining new customers and eventually selling them investment products.

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