Dawn Haldane has a cautionary message for unsophisticated investors: Blindly trusting what a financial representative tells you could prove hazardous to your wealth.
Haldane knows from personal experience. By the time she got angry enough to contact a reporter, her 401(k) money had been “distributed” and her assets reinvested into a spectrum of high-cost mutual funds she couldn’t sell without paying stiff fees. In the process, she’d lost an estimated $4,000.
Her story begins late last year, when she decided to start investing a few thousand dollars in individual stocks.
Since she had never purchased shares on her own before, she simply went to the nearest brokerage firm, which happened to be a Smith Barney office, where she was assigned to the first available broker. After buying a handful of shares, Haldane and her new broker got to talking about Haldane’s other investments. Haldane didn’t have other brokerage accounts, but she did have a substantial retirement nest egg– $155,000–that she had built up in a 401(k) plan while working for Nissan.
Though Haldane no longer worked for Nissan, she had left the account invested with its 401(k) because it was easy and she was happy with the investment performance.
The broker urged her to move the account, stating it would simplify record-keeping and performance-tracking if all her accounts were in one place. Haldane was reluctant. She didn’t want to sell any of her current investments and assumed that moving them would require selling, reinvesting and paying brokerage fees. But the broker assured her the securities could be transferred over in kind. There would be no sales, no fees–just a consolidation of assets under one roof.
Haldane agreed, but things didn’t go as planned. Instead of a statement simply showing her investments housed in a new account, she got a check for $155,000. Her new broker apologized for the mixup and promised to immediately put the money back in the investments that Haldane believed had been sold by accident. But when Haldane got her Smith Barney statement a week later, she learned her $155,000 was parked in a low-yield money market account.
After more frantic calls to the broker, Haldane was informed that the broker had erred. The funds could not be transferred in kind because Haldane’s money was in a 401(k) plan and the plan sponsor’s rules require that the funds be sold when former employees seek to move their money into a rollover IRA.
That is a fairly common requirement, says David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. Most types of investments can be moved from one brokerage house to another without selling. But that’s not usually true when the investment is in a 401(k) plan, he says. Employers that sponsor these plans often allow former employees to leave their money in the plan indefinitely. However, once you opt to move the money into a rollover IRA, the investments generally must be sold.
Worse still, the Smith Barney broker said she couldn’t even purchase the same funds on Haldane’s behalf because she didn’t work with the particular no-load fund company offered through the Nissan retirement plan.
Thinking she had few other choices, Haldane met with the broker and again took her advice, buying a spectrum of mutual funds that the broker maintained would nicely mirror those she had held in her 401(k).
Still, Haldane was left with a sense of unease. Although the broker was pleasant, nothing had gone as promised. She talked to another broker, at another firm, about selling the funds she had just purchased and buying the ones she’d held originally. That’s when she found out that all the funds her broker had recommended were so-called load funds, which charge the investor hefty fees that are paid to the broker who sells the fund. Haldane’s funds were “back-end loaded,” which meant she would lose roughly 5 percent of her account value to these fees–more than $7,000–if she sold the funds within the first few years.
Haldane was no longer uneasy. She was livid. She wrote to the manager of Smith Barney’s Long Beach, Calif., office demanding that her original investments be reinstated. The company initially refused but then–after realizing that Haldane’s story was about to be published–reconsidered.
The brokerage attempted to have Haldane’s 401(k) reinstated, but it appears that Nissan’s rules will not allow it. Nevertheless, Smith Barney has promised to “break her out” of the load funds–in other words, get back her initial investment without charging a fee–and reimburse her for her losses.
However, Haldane and Smith Barney disagree on what went wrong. Although the brokerage acknowledges that it made a mistake on whether the assets could be transferred out of the 401(k) whole, company spokesmen say the investment decisions after that point were Haldane’s. Haldane maintains she was pushed into these investments by a broker who took advantage of her lack of sophistication.
The brokerage house and Haldane do agree on one thing: Before you invest, get all the facts. Don’t rely on verbal assurances. Read all disclosures carefully–even if a broker or financial adviser says they’re unimportant. Your wealth might depend on it.
