Former DOL Deputy Director declares scandal in IRA rollovers. It’s a scandal, just not the one he thinks it is. Blog Feature {% if subscribeProperty|lower == "yes" %} {% else %} {% endif %}
Greg Carpenter

By: Greg Carpenter on August 20th, 2014

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Former DOL Deputy Director declares scandal in IRA rollovers. It’s a scandal, just not the one he thinks it is.

Financial Advice

John Turner is our first undercover pension professional. The former Deputy Director of the DOL’s pension research office posed as a former Federal employee with $200,000 invested in the Federal Thrift Savings Plan. The report on Bloomberg.com is an interesting read. He called representatives of several financial institutions and asked them what he should do with his money – keep it invested in the nation’s largest and lowest cost savings plan - or roll it over into an IRA with the financial services company.

He was surprised when all but one company “told him to” roll his money into an IRA at the financial firm. “It’s a scandal,” said Turner. “They are trying to sell me an IRA clearly not in my interest. It’s in their interest. They want to get the fees.” I’m shocked… shocked!

Technically, these firms did not give Mr. Turner investment advice. Under existing regulations, they presented the merits of their financial products that appeared suitable to Mr. Turner’s stated investment needs. The firms he called are under no requirement to act in Mr. Turner’s best interest as long as they present suitable potential investments. It’s not against the law to have attractive marketing materials and bright, helpful sales reps.

So is there a scandal? Yes. The scandal is that we do not have fiduciary standards in place that require brokers and other advisors to act in the clients’ best interests.

The current standards allow brokers to present sales pitches that appear to be similar to investment advice. Retail investors have a difficult (impossible?) time distinguishing between a sales pitch and unbiased advice. The result is that many investors are lured away from appropriate and low-cost investments into higher-priced investment vehicles sold by someone who puts his or her own fees ahead of the best interests of the investor. Allowing these practices just adds to the many challenges people face in saving for retirement. Financial advisors should be in the business of helping people succeed at investing. Period.

Why would anyone roll money out of the Federal Thrift Savings Plan?

The Federal TSP has with superior performance and, by consensus, the lowest investment fees of any plan. And a retention problem, as the above Bloomberg article also states. Gregory Long, TSP Executive Director, acknowledges that former Federal government employees (think members of our armed forces, office workers and law enforcement) are “swayed by the financial industry’s marketing efforts” to roll money out of the TSP into IRAs. The TSP leadership is considering responses to counter these marketing efforts and keep savings in the plan.

The TSP is the gold standard for retirement plans, but the allure of targeted marketing is even strong enough to get small investors to pull money out of the best plan in the country. With appropriate fiduciary standards, these outflows should become rare, not a growth market for the financial industry. Our ex-military are a particularly strong niche market. Ugh.

The DOL promises to propose fiduciary standards in January, setting rules for how financial professionals should interact with private investors. This issue is too important to kick down the road.

 

About Greg Carpenter

Greg Carpenter founded Employee Fiduciary in 2004. With 29 years of experience in accounting and finance, Greg has brought his expertise to a variety of advisory, senior and executive management roles. Greg has worked for a national accounting firm, a Fortune 500 plan sponsor, a major brokerage firm, and he served as the CEO of a major 401k TPA firm. He is a CPA and earned his BA from Yale and his MBA from The University of Chicago Booth School of Business.