Wolfe had heard many blue-collar co-workers talk about a Merrill Lynch broker who was conducting retirement seminars near the plant. During a meeting in the broker's office, Wolfe stressed that he wanted his money in low-risk investments, according to a statement of claim that Wolfe filed against Merrill Lynch and the broker with the New York Stock Exchange two years later. After the broker assured him that his nest egg would be safe, Wolfe rolled his 401(k) into a Merrill Lynch IRA.
A year and a half later, Wolfe's account was down $250,000. His savings had been placed in technology stocks and in tech-heavy mutual funds -- just as the bubble was bursting. "I felt like the whole world had betrayed me," Wolfe said in an interview.
Regrettably, Wolfe's story is all too common. As companies downsize, workers with early-retirement packages have become targets of brokers looking for investment dollars, according to legal filings and consumer advocates. Many advisers conduct free seminars for employees, often promising returns that they contend will enable prospective retirees to make large withdrawals to meet living expenses.
Reassured, many investors, most in their fifties, turn over their company-plan assets to the brokers. In search of high returns to sustain large withdrawals, the brokers sink clients' assets into risky investments.
"The pitch is, 'Why work?' " says Peter Mougey, a lawyer with Beggs & Lane in Pensacola, Fla., who represented early retirees at a Marathon Oil refinery in Robinson, Ill. "The retirees end up in a death spiral of exorbitant withdrawal rates and a flat market."
The scenario became so widespread that NASD, formerly the National Association of Securities Dealers, issued an "investor alert" last September. The alert warned employees mulling early-retirement offers to be skeptical of pitches guaranteeing an easy life (www.nasd.com, click "Investor Information").
At the same time, NASD announced it had fined Securities America Inc. in Omaha $2.5 million, alleging that the firm failed to supervise one of its brokers. NASD contends that the broker convinced 32 longtime employees of Exxon Corp. in Baton Rouge, La., to retire early and invest their assets with him. According to NASD, the broker did not explain to the retirees that the potential of high returns also involved "a higher degree of risk to the principal." In a settlement with NASD, Securities America was to pay the clients $13.8 million in restitution.
In the settlement, Securities America neither admitted nor denied the allegations. Janine Wertheim, chief marketing officer, says the firm has "made and will continue to make significant investments in our compliance and supervision."
Protecting Your Nest Egg
If you're considering early retirement, you can take steps to protect your nest egg. "Most people do more research on the dishwasher they buy than on the broker they use or investments they make," says Jacob Zamansky, a lawyer with Zamansky & Associates in New York City, who represented Wolfe. After an NYSE arbitration panel ordered restitution in January 2003, Merrill Lynch paid Wolfe $235,000.
First, check out the adviser, even if the person works for a major brokerage firm. John Gannon, senior vice-president of NASD, notes that many brokers don't have much experience with retirees, whose goals of generating income while preserving principal differ from objectives of younger investors. Question the broker about his or her expertise with retirees.
Check a broker's job history and disciplinary record using NASD's BrokerCheck Web tool. Brokers get paid when they sell products, so first consider seeking advice from a fee-only planner. The National Association of Personal Financial Advisors (www.napfa.org; 800-366-2732) is a good place to start.
Also, be skeptical of promises of sustained high returns. No one can guarantee what the market will do. Any suggestion that you should withdraw more than 4% or 5% a year is a red flag. And make sure your portfolio is diversified.
Charles Schiller, who worked at Marathon Oil for 31 years, says he decided to retire in 1998 at age 53 based on promises by Merrill brokers who conducted seminars at the company. He was earning $67,000 a year and had a pension and a 401(k) worth a total of about $450,000. The brokers, he says, convinced him to take a lump-sum payout from his pension.
The brokers promised Schiller that he could afford to withdraw the 10% he needed for living expenses. "They told us our nest egg would be safe for life," he says. In 2000, his account started to decline, he says. But Schiller was committed to the high withdrawal rate until age 591/2. Cutting back would have subjected previous withdrawals to a 10% tax penalty.
To generate higher returns, Schiller says, the brokers began to invest in high-yield bonds and tech-oriented funds. By 2002, he had lost $200,000 -- as well as 50 pounds as a result of anxiety. He now earns $20,000 a year, in part from a lawn-mowing business he started. His wife, Judy, 59, had hoped to retire from her bank job, but she says she can't afford to.
"I learned the hard way that nobody can promise you high returns," Schiller says. "And if they tell you that you can withdraw more than 5%, they're blowing smoke." In December 2004, Schiller and several other Marathon employees and retirees were awarded damages from Merrill Lynch in an NASD arbitration. Schiller received about $66,000. The panel noted that the Merrill Lynch brokers did not induce the plaintiffs to retire early but that the firm did not properly supervise and train the brokers.
Regarding Rubbermaid and Marathon Oil, Merrill spokesman Mark Herr says, "The greatest factor during this time period is that these men and women retired just before the stock market hit the longest and worst downturn since the Great Depression."
On the Marathon case, Herr says that Merrill Lynch disagrees with the panel's finding regarding training and oversight but that the firm is always working to improve both.
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