<strong>At her new job Mrs. Sanchez meets the advisor retained by the fund provider used by her new employer.</strong>The advisor wants to transfer Mrs. Sanchez’ account from the plan of her former employer to her new 403(b) plan. The existing contract is no longer subject to surrender charges and fees are on par with the proposed contract.

Mrs. Sanchez does not have an immediate need for income, and primarily invests in an equity based portfolio. Her goal is to continue investing towards retirement. The new advisor receives commission compensation for transferring the prior 403b contract to the new employer’s plan. The advisor discloses the new fees and surrender schedule of the contract. The agent positions the transaction as attractive because of the “ease of doing business” and “asset consolidation” and “the ability to continue to take loans” against the account.

The advisor does not present the merits of remaining in Mrs. Sanchez’s previous employer’s plan, or transferring to a lower cost mutual fund option, or researching no-load mutual fund options available to Mrs. Sanchez. Essentially, the advisor only proposes what the advisor can sell and, due to the compensation structure, the advisor is conflicted from providing advice on lower cost investment products and/or services that will not generate income for the advisor.

This is a non-ERISA plan, and the transaction from one non-ERISA account to another non-ERISA account is not subject to the new DOL Fiduciary Rule. However, there are a number of key omissions and conflicts present. First, the option of keeping the funds in her prior employer’s 403(b) plan was not fully discussed. Second, the exploration of other lower cost funds that would meet Mrs. Sanchez’ investment objectives was not reviewed. The fact the advisor would be commissioned for the assets transferring and not commissioned for the assets staying in place is a conflict. Furthermore, the indirect pressure and incentives for the advisor to recommend moving these funds (such as sales contests, invitations to sales conferences, company standing and job retention) are not disclosed to Mrs. Sanchez.

Mrs. Sanchez’ reliance on the advisor representing the approved vendor may lead Mr. Sanchez down a very narrow scope of guidance that is conflicted and less than thorough.

Professor Asad teaches math at a large private university. Earlier in her career, she selected the lowest cost variable annuity provider after careful review of the 3 approved retirement plan vendors. After participating in the plan for twenty years, Dr. Assad meets with an advisor employed by a different (approved) retirement plan vendor. The advisor describes the benefit of working with a local advisor, advisory services available from his firm, and other features of doing business with his firm that he believes will be attractive to Dr. Asad. Additionally, he mentions the one-time premium bonus payment Dr. Asad will receive if she transfers her assets to a new proposed variable annuity contract.

Dr. Asad, attracted by the bonus payment and the personalized local service, decides to transfer her assets. The advisor receives “performance based variable pay” – in effect, a commission, for his success in getting Dr. Assad to purchase the new annuity. In making this transfer Dr. Asad will experience a significant increase in investment and advisory fees. The bonus payment used to incent Dr. Asad is linked to extensive withdrawal restrictions and surrender charges under the new contract. Dr. Asad also fails to realize that the features explained by the advisor are not permanent features of the new contract – but are subject to change by the annuity provider. There is also a real possibility that Dr. Asad will not be working with this advisor down the road, particularly if the advisor is terminated or leaves his firm. Also, the advisor and/or his firm may retain the right to reassign her account to another advisor without Dr. Asad’s consent.

In addition to increased fees and newly established withdrawal and surrender charges, Dr. Asad is now faced with another unexpected matter, cyber risk. Her assets and confidential information are not only retained by the approved vendor, the data is readily accessible to the advisor and potential other employees of the approved vendor - who are also compensated by commissions or other variable compensation contracts. While advisors and other employees of the approved retirement plan vendor are contractually and legally prohibited from sharing this information with unaffiliated third parties, there is little stopping an advisor from keeping this information and using it when they switch firms.

Inviting commissioned sales representatives on campus invites risk. While the risk can be mitigated, it cannot be entirely eliminated. Plan sponsors and employees should be fully aware of how their selected advisor or plan representative is compensated. It will be the strongest indicator of an advisor’s intent in recommending certain transactions and services.

Mr. Cannon has been enrolled in his employer’s 457(b) deferred compensation plan since he first joined the Department. After a few years of service, Mr. Cannon and his family decided to relocate to another state and accepted a position with another fire department.

Following Mr. Cannon’s relocation, he meets with his local bank to ask for advice on what he should do with the balance saved in his deferred compensation plan. The bank’s branch manager sets an appointment for Mr. Cannon to speak with the onsite licensed advisor. Mr. Cannon is concerned about the recent market volatility he’s been hearing about in the news and is seeking advice on how best to invest his retirement savings. After listening to Mr. Cannon’s concerns, the advisor suggests a fixed annuity contract. The advisor explains that the fixed annuity functions like a CD, but with a much higher interest rate. The advisor also emphasizes that a fixed annuity doesn’t lose money. Given his concerns over market volatility and the guarantees of the fixed annuity, Mr. Cannon purchases the fixed annuity by establishing a rollover IRA.

The advisor has failed to point out that while the former employer’s 457(b) plan was not subject to the 10% IRS penalty tax, the rollover now takes on the tax characteristics of the IRA. This means that withdrawals from the IRA before 59-1/2 will trigger a 10% penalty tax. Furthermore, his new investment in the index annuity will now be subject to surrender charges and withdrawals restrictions.

Mr. Cannon does not understand the contractual limitations of the fixed annuity. Apart from the required legal paperwork and disclosure forms completed and signed by Mr. Cannon, the advisor fails to fully disclose the negative implications of investing his retirement assets in a fixed annuity or to provide Mr. Cannon with information on other options that can decrease risk while still keeping Mr. Cannon invested in the market, particularly in light of Mr. Cannon’s age and retirement time horizon. Additionally, the advisor failed to disclose his participation in his banks various sales contests, his fixed annuity sales goal, and the compensation he’ll receive as a result of the sale.

This transaction was effected by an agent unaffiliated with Mr. Cannon’s previous employer. However, the lack of access to a non-conflicted, unbiased source to help Mr. Cannon reach an informed decision has resulted in decision that was driven by the advisor’s compensation, rather than Mr. Cannon’s best financial interests.

Dr. Walker is a surgeon at a university hospital and actively participates in his employer’s 403(b) plan. As a result of the hospital’s good work, employees are offered a low-cost retirement plan with institutionally priced mutual funds and a high quality stable value account. For the past 15 years, Dr. Walker has been maximizing his contributions to the hospital plan. Dr. Walker receives a call on his 60th birthday from the advisor representing the investment provider for the hospital’s retirement plan. The advisor informs Dr. Walker that he is now eligible to roll his balance to an investment that would lock in his gains, protect against his account against market losses and participate in future market gains. After completing a free financial plan, the advisor recommends Dr. Walker transfer his 403(b) account to an indexed annuity. Dr. Walker likes the idea of locking in his market gains and feels comfortable working with the advisor because she represents the company that provides the hospital’s plan.

Dr. Walker begins the paperwork with the advisor. Pressed for time, Dr. Walker moves quickly, stopping to ask just a couple questions. Dr. Walker inquires about investment fees and access to his money. The advisor explains that an indexed annuity has no investment fees and informs Dr. Walker of the contract’s surrender schedule and the 10% ‘free out’ provision that would provide Dr. Walker with liquidity.

Months following the transaction, Dr. Walker realizes he has not received a statement for his annuity. He attempts to contact the advisor who sold him the annuity and learns she is no longer with the company and his account has been reassigned. Dr. Walker meets with his newly assigned advisor and is informed that the balance of the contract is updated once a year. Although concerned, Dr. Walker assures himself that his new investment is with a company his employer approved to provide retirement services to hospital employees.

Several months later, Dr. Walker receives his first statement and he sees a 2% return despite strong market returns. Dr. Walker calls the number on his statement and is told that interest is credited based on returns of the S&P 500, as modified by the contract’s “participation rate” and “cap rate,” terms Dr. Walker does not recall discussing with the selling advisor. After careful review of his contract, Dr. Walker realizes these provisions are, in fact, outlined. Dr. Walker realizes he relied too heavily on the selling advisor’s description of the contract and he did not spend enough time reviewing the key provisions. Upset, Dr. Walker contacts the 1-800 number on his contract and requests a transfer back to his retirement plan. He is informed that his contract’s “free look” period has expired and transferring his money to his retirement plan results in an 8% surrender charge. Dr. Walker is also informed about the limits on the 10% “free out” provision that he thought would provide liquidity. Essentially, Dr. Walker has to pay almost $40,000 to transfer his funds back.

The plan’s advisor took advantage of a captive market. The advisor had direct access to Dr. Walker’s personal and confidential information that allowed her to market a highly complex financial product. Dr. Walker’s level of trust based on his employer’s implicit endorsement of the provider set off a series of events that have undermined Dr. Walker’s finances.

Mr. Demetri recently accepted a partner position in an engineering firm. Shortly after departing his previous employer, Mr. Demetri receives a call from a representative of his former employer’s retirement plan. The representative informs Mr. Demetri that as a result of his separation from service, he is eligible to rollover his funds into another investment product. The representative proceeds to outline the many benefits of rolling over his funds to an IRA, noting that Mr. Demetri will not have to contact his employer every time he wants to access his money and that an IRA will put the account in his control.

The phone rep proceeds to ask Mr. Demetri several clarifying questions and completes a suitability tool with Mr. Demetri. Following the review, the representative recommends a variable annuity contract with a guaranteed income benefit. Intrigued by the thought of having a guarantee, Mr. Demetri asks about his ability to stay invested in the market and about the company providing the product. He’s informed his funds would continue to stay invested in the market and the company issuing the variable annuity contract is the same company entrusted to provide his former employer with investments in the employer’s retirement plan.

Mr. Demertri is reluctant to proceed with the transaction, especially over the phone. He’s also wary of the significant increase in fees. The representative informs Mr. Demetri that he is a qualified advisor who works with hundreds of clients over the phone and is able to complete the transaction and corresponding paperwork remotely. The representative further explains the fees are relatively low considering the benefit and assurance of lifetime income. After overcoming several objections by Mr. Demetri, the advisor eventually convinces him to proceed with the variable annuity contract.

The representative’s recommendation is not driven by Mr. Demeri’s best interest. Rather, it is a result of the representative’s compensation plan and the sales goals. Absent in the process was any non-conflicted, objective assessment of the alternatives available to Mr. Demetri. There was no mention of transferring Mr. Demertri’s plan to his newly established 401(k) with his new provider nor was there any discussion of reallocating investments in his former employer’s plan to better suit his current investment objectives.

Compensation structures used by plan providers create powerful incentives for representatives to steer participants who have a distributable event in their employer-sponsored plan. There is no requirement for this “advisor” to discuss all options or to disclose the amount of compensation earned by the advisor in selling this annuity. And, any descriptions of advisor compensation made by retirement plan providers can be intentionally cryptic and misleading.