Retirement planning can be treacherous. Some of the more egregious claims against stockbrokers involve the provision of fraudulent or negligent retirement advice, and it is an ever growing phenomena. It is not an ever growing phenomena due to the increasing incidence of negligent or unscrupulous stockbrokers, it is an ever growing phenomena due to the discontinuation of defined benefit plans and the rise of direct contribution plans among all or most of America’s retiring workforce.

According to a study by the National Institute of Retirement Security published in 2013, private sector employers have shifted away from traditional defined benefit pensions, which provide a stable source of income that lasts through retirement and are managed by professionals. Instead, most private sector employees with workplace retirement plans must rely upon defined contribution individual investment accounts, such as 401(k) plan accounts, which were originally designed to supplement rather than replace direct benefit plans. Now, the risk and much of the funding burden falls on individuals, who tend to have difficulty contributing enough on their own and who typically lack investment expertise.

This shift from defined benefit plans to direct contribution has significantly eroded the retirement readiness of Americans to retire. More than 38 million working age households or 45% do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA. The collective retirement savings gap among working households age 25-64 ranges from $6.8 to $14 trillion, depending on the financial measure. Financial experts suggest that people need between eight and eleven times income in retirement assets in order to maintain their standard of living in retirement.

Some stockbrokers hold themselves out as providing retirement planning or providing financial specifically for early retirees. Others hold themselves out using misleading designations such as “certified senior adviser,” “senior specialist,” or “retirement planning specialist.” Many retirees and particularly early retirees, aside from their employer sponsored retirement plan have no significant prior investment experience, and generally no appreciable assets, other than perhaps their residence, aside from their employer sponsored retirement savings.

However, each year major American corporations offer their employees retirement. Some pay offer their employees early retirement bonuses, benefits or severance for those of a combination of a certain age and certain number of years with the company. Very often these same companies allow stockbrokers and brokerage firms to hold “free” retirement planning lunches or dinners, with the expressed understanding that these lump sum retirement funds will be invested or rolled over into private qualified retirement plans.

Unfortunately, in many instances, instead of providing these retirees with sustainable distribution rates or rates of return from these accounts, stockbrokers or purported investment specialists, provide or suggest to retirees that they can obtain extraordinary or unsustainable distributions in the form of annual income from these accounts, and in some cases using IRS Code 72t, and for those retirees older than 59 ½ years old but younger that 65 years old, lock these retirees into mandatory distributions, in the form of substantially equal periodic payments (SEPP) over a period of five years, which cannot be modified without certain penalties.

In some cases, stockbrokers have chosen or promised their customers distribution rates as high as 9%. Scholarly articles and academic studies find that the incidence of “retirement portfolio failure” or the probability that one’s retirement assets will not last their retirement life span increases to 50% at withdrawal rates of 6%, thereafter increases to 70%, as withdrawal rates approach of 7% of total retirement savings.

More often than not, aggressive or otherwise speculative investments are purchased in these accounts, which sometimes result in catastrophic losses, and generally the stockbroker will defend such speculative selections on the basis that they were required or justified to take such risk in order to fulfill the investor’s income requirements or expectations.

Perhaps more importantly, unsophisticated investors and early retirees that fall victim to these tactics are often confronted by the notion that despite what they were being told about returns, or their prior returns less their actual losses, once their accounts head south, that on a net out-of-pocket basis they have no losses and simply spent their own money. Given the age, unemployability, and lack of other assets by these people, the results can be tragic.

Net out-of-pocket damages however are not always the appropriate measure of damages. In addition to actual damages, well managed portfolio damages include the difference between the losses incurred on the sale of the greater amount the investor would have received had they not been defrauded and the more conservative securities had been bought and sold. The proper measure of damages is the difference between the “fair market value of all received and the fair value of what he would have received had there been no fraudulent conduct.”

Guiliano Law Firm

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