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RETIREMENT AT RISK

Nest egg to goose egg in no time

Brokers with rosy sales pitches lure unwary 401(k) holders. The results can be ruinous.

December 17, 2006|Jonathan Peterson | Times Staff Writer

BATON ROUGE, LA. — Like many of his co-workers, Bradley Simon had put in decades at the Exxon Mobil refinery, building up a stout 401(k) retirement account and enviable pension benefits.

So he listened carefully to the investment broker's pitch that he should seize a head start on the golden years.

"He said, 'Why are you still working?' " Simon recalled. "He said, 'I can make you more money staying at home.' "

At 54, Simon quit his job making ethylene and turned over more than $700,000 to David L. McFadden, a broker for Omaha-based Securities America Inc. McFadden promised to keep the portfolio growing and told Simon that he could safely withdraw $65,000 a year for living expenses.

Then the stock market tanked. Simon's savings dropped even more than the market, 65% over two years.

Regulators later said McFadden defrauded his clients by exaggerating the returns they could expect under his program, steered them into overly risky investments with high fees and encouraged them to withdraw more than they could afford.

Simon had to sell his condominium on southwestern Louisiana's Vermilion Bay and go back to work, this time hauling oil equipment to distant cities with a used truck.

"That's my epitaph: 'This guy was stupid,' " said Simon, sitting at the kitchen table of his home in Vermilion Parish, deep in Cajun country. "I'm the rock star of stupid."

As guaranteed pensions are replaced by 401(k) plans, more and more Americans have been left to make their own investment decisions for their retirement savings. As Simon's experience shows, the results are sometimes tragic.

Americans now have $2.9 trillion in 401(k) accounts and similar plans that are largely funded and controlled by workers.

When employees retire, companies are under no obligation to offer guidance on how to manage the money. Most do not, said Don M. Blandin, president of Investor Protection Trust, a nonprofit company that promotes financial education.

"The increasing responsibility on individuals to manage their long-term financial security has reached an urgent stage in American society," Blandin said. "Too many people are getting scammed, and too many people are becoming targets."

Regulators last month banned McFadden from working as an investment broker for life, saying his actions squandered the savings of dozens of Exxon Mobil Corp. retirees and others in the Baton Rouge area.

Common pattern

The case fits an increasingly common pattern: Workers with limited investment experience fall for rosy sales pitches. Required warnings are soft-pedaled or omitted. Brokers steer retirees into investments that pay lucrative sales commissions.

In New York, early retirees from Eastman Kodak Co. are pressing claims against Morgan Stanley. In Mississippi, Chevron Corp. workers are taking action against a broker for Prudential Financial Inc. In North Carolina, BellSouth Corp. retirees sued brokers from Smith Barney, now part of Citigroup.

Telecommunications workers in California's Central Valley, airline pilots in Texas and railroad workers in the Midwest say they have been victimized by brokers who persuaded them to stop working and live off their assets. Many other cases have been settled in secrecy.

"The retirement security of American workers is at risk from unscrupulous salesmen pitching 'pie in the sky' investment programs to those about to retire from a lifetime's work," said Joseph P. Borg, president of the North American Securities Administrators Assn. "Securities regulators around the country are hearing from increasing numbers of investors."

After the retirees realize that they have made a calamitous mistake, there is often little they can do.

"Now they're 60. They can't get a job at the plant where they were working," said Peter J. Mougey, a Pensacola, Fla., lawyer who is representing Chevron retirees in the Mississippi case. "They're out mowing lawns. Who's going to hire them when they're 60 years old? The advice ruins them for the rest of their life."

The potential for harm is rising as employers push older workers to take early retirement. In the automotive industry alone, an estimated 200,000 hourly workers became eligible this year for buyout offers.

"It's almost the perfect storm in terms of the opportunities it presents for folks to be taken advantage of," said James S. Shorris, head of enforcement at NASD, formerly the National Assn. of Securities Dealers.

'A little bit greedy'

The Louisiana retirees, most of whom made their decisions in the booming stock market of the late 1990s, concede that they lacked financial savvy.

They put their trust in McFadden, a Baton Rouge broker who conjured visions of wealth and teased workers that they would have to learn how to spend their newfound riches.

At seminars in a Baton Rouge seafood house, McFadden talked up the benefits of escaping the refinery, a sprawl of tanks and smokestacks near the Mississippi River, and the industrialized slice of Louisiana that some call "Cancer Alley."

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