The Wall Street Journal-20080204-Investing in Funds- A Monthly Analysis- Be Skeptical of the Hard Sell- Even if It-s in the Workplace

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Investing in Funds: A Monthly Analysis; Be Skeptical of the Hard Sell, Even if It's in the Workplace

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To Janet Eisenberg, her financial adviser's assurances that she could retire at age 52 sounded reasonable, considering how much she had saved during 33 years as a secretary at Eastman Kodak Co. Besides, many of her co-workers had used the same adviser after learning of his services through fliers posted at work and referrals by Kodak retirement counselors.

But last month, Ms. Eisenberg and three other former Kodak employees in Rochester, N.Y., filed a claim against Morgan Stanley in a New York state court, seeking class-action status, for what they say were the false promises of the financial adviser, a former stockbroker at the Wall Street firm. Sixteen other former Kodak employees have filed a joint arbitration claim against the firm and the broker with the brokerage industry's major self-regulatory organization. The investors say he encouraged them to retire early, and even told some they would have more money in retirement than working.

For Ms. Eisenberg and others, that didn't happen. Morgan Stanley and a lawyer for the broker dispute the claims, but the case sheds light on a trend that worries regulators: financial advisers who entice large groups of employees to retire early, and cash out of employer- sponsored plans. The employees then invest the lump sum with the adviser.

Many investors know to be on guard for sales pitches at "free-lunch" seminars sponsored by stockbrokers at hotels or country clubs. But when they hear about a financial adviser through their employer, they may be more trusting.

That trust isn't always warranted. Just because an employer passes along contact information for a financial adviser, or even allows an adviser to hold a seminar on-site, it doesn't mean the company has vetted the person. Regulators fear that unscrupulous brokers are taking advantage of workplace locations to lure investors into inappropriate investments.

Potential targets in early-retirement pitches aren't just older employees: Even younger workers accept early-retirement packages. When they do, they often must cash out of their employer-sponsored retirement plans and figure out what to do with sometimes large sums of money.

Human-resources departments think they're helping workers by giving them access to financial professionals, says Elisse Walter, senior executive vice president of regulatory policy and programs at the Financial Industry Regulatory Authority, or Finra, which was formed last year in a merger of the National Association of Securities Dealers and a regulatory arm of the New York Stock Exchange.

Many of the professionals can be quite good, she says, but "we have found some very problematic ones."

In a June survey by Finra, 42% of 1,334 investors said they had received advice or information recommending that they roll over their pension, 401(k) retirement-savings account or other employer-sponsored retirement plan, and invest the proceeds. Of those who said they received such advice, 27% said they received it at "an investment seminar or group meeting I learned about through my employer."

Under long-standing federal law, employers who sponsor retirement plans are supposed to act in the best interest of plan participants when they offer advice as part of the program, and Congress aimed to encourage them to provide such advice as part of the 2006 Pension Protection Act.

But if a financial adviser holding a session at a workplace makes recommendations for what should happen after an investor withdraws his or her assets from the retirement plan, an employer's duties to screen the adviser "don't apply at that point," says Douglas Hinson, head of the federal Employee Retirement Income Security Act litigation group at Atlanta-based law firm Alston & Bird.

Retirement assets are big money -- $16.4 trillion at the end of 2006, according to the Investment Company Institute, a Washington, D.C., fund-industry trade group. With millions of baby boomers starting to retire, financial advisers are fighting for a piece of the action.

In the kinds of pitches that regulators are concerned about, financial advisers often point to an Internal Revenue Service rule that lets people withdraw money from some retirement accounts before they reach age 59 1/2, if they pay a 10% penalty. If the distributions are part of "a series of substantially equal periodic payments," investors can avoid the penalty. Finra has warned in an investor alert on its Web site that "there's a lot more to a successful early retirement than avoiding a 10% tax penalty."

Ms. Eisenberg, the former Kodak secretary who retired in 1998, says she was promised that she could withdraw 10% of the approximately $383,000 she had saved in her 401(k) and pension and still "make more not working than working." She recalls then-Morgan Stanley broker Michael James Kazacos, who recently retired from the firm, telling her that in six or seven years, "I'd probably be a millionaire."

At the time, those claims didn't sound improbable. The broader stock market returned nearly 29% in 1998 and 21% in 1999, as the tech-stock bubble neared the point it would burst.

By 2002, though, her account was down by more than one-third, to about $240,000, her lawyers maintain.

Mr. Kazacos's lawyer, David Gourevitch, based in New York, and a Morgan Stanley spokeswoman both say the investors' losses were due to the bear market from 2000-2002 and the retirees' own spending.

Morgan Stanley spokeswoman Christy Pollak says the clients received appropriate investment recommendations and risk disclosures. "None of these clients were improperly induced to retire by Morgan Stanley, and many decided to accept retirement packages rather than face the prospect of imminent layoffs," she says. "Moreover, a substantial portion of the clients' alleged 'losses' constituted funds the clients withdrew from their accounts for personal expenditures."

Ms. Eisenberg had taken out money, she and her lawyers acknowledge -- but only the money that Mr. Kazacos told her she could comfortably withdraw, they say. She says she wasn't facing a layoff, and maintains she retired early only because the broker told her she could afford to.

Finra, which runs the arbitration forum where brokerage disputes are heard, is investigating Morgan Stanley's practices with the Kodak employees, according to people familiar with the matter; Morgan Stanley declines to comment on the matter.

The Finra-predecessor NASD has penalized two firms for pitches by brokers that allegedly encouraged groups of employees to retire early: In 2006, it fined Securities America, a unit of Ameriprise Financial Inc., for pitches to workers of Exxon Mobil Corp., and in 2007, it penalized Citigroup Inc. for pitches to workers of BellSouth Corp., now part of AT&T Inc. The brokerage firms neither admitted nor denied the allegations.

In December, William Galvin, Massachusetts' top securities regulator, filed an administrative complaint against A.G. Edwards & Sons, now a unit of Wachovia Corp., alleging that a broker made similar pitches to employees of Boston Edison Co., now Nstar. Wachovia declines to comment. Mr. Galvin says he is investigating other cases as well.

Regulators are now trying to get in front of investors before scam artists do. In 2006, the NASD issued investor alerts titled "Think Twice Before Cashing Out Your 401(k)" and "Look Before You Leave: Don't Be Misled By Early Retirement Investment Pitches That Promise Too Much."

Finra is trying to form alliances with human-resources departments, unions and organizations that may be in a position to screen financial advisers.

Employers take different tacks when it comes to helping employees plan their finances, with a small but growing number providing access to free financial advice outside the company plan.

Unions also have different approaches: The AFL-CIO generally doesn't allow its chartered state and local bodies to use union halls for seminars by financial advisers, says Damon Silvers, associate general counsel at the AFL-CIO. But local unions and other AFL-CIO members may allow it, he adds.

If an employer allows a financial adviser to give a presentation or advertise at its site, the company should disclose there is nothing official about the information, says Mr. Galvin, the state regulator. Companies shouldn't include a financial adviser's contact information with official documents about layoffs or early-retirement packages, he says.

Mr. Hinson, the lawyer, hasn't seen many cases where a worker sues an employer for bad advice from a financial adviser. "The ultimate target of most of that litigation is going to be the broker," he says. Still, he says, the safest way to help workers find good advice about non-retirement savings, including cash-outs and rollovers from retirement plans, is to urge them to get professional advice without pointing them to a particular professional.

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Ms. Pessin is a reporter for Dow Jones Newswires in Jersey City, N.J. She can be reached at [email protected].