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Retirees Particularly Vulnerable in 401(k) Rollovers

America’s population of retirees is larger than ever. According to U.S. News and World Reports, in the decade between 2000 and 2010, the 65-and-over demographic jumped by over 15 percent—significantly greater than the 9.7 percent increase of the total population. Not surprisingly, Florida leads the nation in retirees, with 17.3 percent of its population at or over the age of 65. And as this age group continues to leave the workforce—and other workers look ahead to retirement themselves—many are asking if they are properly financially poised to navigate the post-employment years.

As Bloomberg recently reported, more and more retirees are choosing to answer this question by rolling over their 401(k)-type accounts into IRAs.

The Growth of IRAs

Rolling over a 401(k) into an IRA can be attractive for a variety of reasons. But brokers and brokerages have been increasingly touting the appeal of the “choice” inherent in an IRA. A 401(k) typically limits the scope of where its funds can be invested. But an IRA offers the ability to choose among many types of investments.

Today, there are $5.9 trillion U.S. assets tied up in 401(k) plans and $6.5 trillion in IRAs. Over $280 billion was moved from 401(k)-style plans to IRAs in 2010 alone. From 2006 through 2010, over $250 billion was rolled over each year. Financial professionals have been cold calling retirees—explaining the virtues of the IRA (and often offering cash to sweeten the prospect of switching)—in efforts to move evermore funds from 401(k) accounts to IRAs.

The Risks of Rolling Over

But the rising popularity of the IRA has drawbacks.

“You’re going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA,” said Karen Friedman, policy director of a retiree advocacy group.

The New York Times has called specific attention to the funneling of retirement assets into non-traded REITs, which are real estate investment trusts without a public trading market. As of 2012, there was approximately $65 billion tied up in these REITs, a growth of nearly 33 percent in only three years.

Non-traded REITs are often inappropriately illiquid for elderly, retired investors. Retirees with shorter investment time horizons may not be well suited for an investment that cannot be touched until years into the future. But unsophisticated investors may not properly understand the nature of these complex investment products. They may not fully appreciate the difficulty of accessing the money tied up in these investments. And this disparity of understanding can lead to abuse and litigation.

In 2013, for example, Massachusetts secured a $2.5 settlement with LPL Financial over non-traded REITs. And in 2012, FINRA imposed a $14 million fine on David Lerner Associates for the same. In the latter case, FINRA’s chief of enforcement publically accused the firm of targeting the unsophisticated and the elderly.

Bloomberg has uncovered complaints by employees at Hewlett-Packard, United Parcel Service, and AT&T—all alleging the same thing: “that sales representatives lured them into rolling over their 401(k) nest eggs into unsuitable IRA investments.”

Though both types of accounts have merit, not every kind investment is right for every kind of investor.

If you have been the victim of financial exploitation, you should contact Gregory Tendrich, P.A. to discuss the specifics of your case and to understand what legal options are available to you.

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