Investor Alert: Risky Tradeoffs in Retirement Plan Withdrawals

Nov 20

State pension funds provide an attractive benefit for public-sector employees: a monthly annuity payment for life. 

These benefits are attactive to investment salespeople as well. They can reap a windfall in commissions and fees by convincing public sector workers to roll over some or all of their pension money into other investments.

Before handing over control of lifelong retirement income, however, pension holders need to consider all the ramifications – including costly, inappropriate investments and the possibility of outright fraud.

The State Securities Board and federal regulators have investigated, prosecuted, or issued orders in several pension- and retirement-plan cases in recent years. Selected cases, summarized below, involve the theft of millions of dollars from school district and state of Texas employees and retirees. Penalties included suspensions, fines, and other sanctions related to mismanagement of investors’ accounts.

Pension withdrawals aren’t the only area of concern. Federal employees are withdrawing billions of dollars from their Thrift Savings Plan accounts, and TSP officials say industry sales pitches may be convincing plan participants to invest money in higher-cost products.

Consider All the Consequences

Besides the threat of fraud, public-sector workers should be skeptical about every aspect of an investment sales pitch. One example is an offer to “maximize” benefits by urging employees to consider partial lump-sum withdrawals from a retirement system and invest the money with an outside financial adviser. In other cases, investment advisers might offer to explain options for choosing survivorship and other benefits – even though that information is readily available from the retirement system.

In the separate Texas retirement systems for state employees and teachers, taking a partial lump-sum withdrawal at retirement permanently reduces a member’s monthly annuity.

State employees who withdraw their entire retirement account terminate their retirement system membership and give up their rights to future benefits. If they return to state employment, they’re subject to the benefit rules for new employees, which means starting over in the number of years required to vest in the pension system and qualify for retiree health insurance. Also, the value of benefits available as a new employee may be less than the benefits would be if the employee had not terminated membership.

Employees should take advantage of the extensive benefits counseling services their retirement system already provides. A public retirement system doesn’t have a conflict of interest in the free advice it provides its members. The advice from financial professionals may be influenced by the amount of fees they can earn.

Generally, anyone wanting to sell securities must be registered to do so – a fact many investors don’t realize. An unregistered investment promoter with nothing more than a website and a direct-mail operation is likely violating the law by selling investments to the public.

Regulatory reports on registered financial advisers can be obtained through the State Securities Board’s Investor Education program. The reports include an individual’s employment history, a limited record of any actions taken by state and federal regulators, complaints, and civil and criminal court actions. Additional information is available by calling the State Securities Board at (888) 663-0009.


A pension is known as a defined benefit plan because it pays a specific benefit to retired employees. The annuity is typically based on the employee’s age, years on the job, and highest average salary over final years of employment. Some pensions allow partial lump-sum withdrawals at the time of retirement, but this option generally results in a lower annuity payment.

Retirement savings vehicles like Individual Retirement Accounts and workplace 401(k), 457, and 403(b) plans are defined contribution plans. Your retirement income depends on how much is contributed to plan, your choice of investments, and the return on investment. 

Investing On Your Own

If public employees move money out of a pension, they should take a hard look at their investing knowledge, because they will be making their own decisions or depending on a financial adviser to do it for them. All the risk transfers from a pension fund to the individual.

In a 2012 study on how potential changes in its pension plan would affect school district employees, the Teacher Retirement System of Texas (TRS) calculated that the vast majority of TRS members would do “significantly worse investing on their own in a plan with a defined contribution component.”

The TRS said two-thirds of its members, if left to invest on their own, wouldn’t even receive 60% of the benefits they currently receive.

Investing on your own, with or without a financial adviser, means you run a risk of placing funds into a costly investments that may not be appropriate for a retirement account. For example, a variable annuity is an insurance-based product that can charge high fees and impose hefty “surrender charges” for withdrawing money before a certain period of time has elapsed. (In Texas, the different types of annuities are generally regulated by the Texas Department of Insurance.)

Promissory notes, often touted as a high-yield, no-risk investment, are basically IOUs from a company or individual that are sold to fund everything from property development to oil and gas exploration, or as a way to buy interests in a business partnership. Individual investors may not have the skill to evaluate the creditworthiness or prospects of a project that is supposed to generate enough revenue to pay the promised return on the notes.

Other risky investment products and fraudulent schemes are explained in the State Securities Board’s Top Investor Threats.

Keep in mind that your decisions can have a big impact on making your money last over what could be a decades-long retirement. According to new estimates by the Society of Actuaries, an average 65-year-old woman and 65-year-old man are expected to live to 88.8 and 86.4 years of age, respectively.  That’s an increase of two years for men and women since 2000.

Even retirees who feel they have adequate assets for retirement and trustworthy  advisers should recognize that unsuitable investments and excessive costs could erode savings that must last a long time.

Federal Rollover Boom

In June, the Fort Worth Regional Office of the Securities and Exchange Commission kicked off a conference for federal employees considering retirement with the topic, “TSP: Myths and Sales Pitches.” The presentation explained the benefits and options available to participants in the plan, but also examined – and dismantled – the false and exaggerated sales pitches used by some unscrupulous salespersons to try to convince participants to withdraw their money to invest elsewhere.

Active and former U.S. government employees and members of the military are moving billions of dollars out of the TSP, the 401(k) plan they can participate in to supplement their pensions.

The TSP is considered the gold standard of 401(k)s because it charges extremely low fees and offers mutual funds that invest in a cross-section of the stock and bond markets. Its returns have far outpaced similar mutual funds, in large part due to costs that are about 1/25th or less of what the average mutual fund charges.

The TSP’s large-company U.S. stock fund, for example, charges 0.029% in annual expenses compared with the 0.74% operating fee charged by the average equity fund. The TSP fund, then, charges $2.90 per $10,000 compared with $74 per $10,000 charged by the average equity fund. Over time, that results in a huge difference in returns. The TSP’s expenses are also “all in,” while the operating fee for other funds does not include any sales charges imposed on investors.

Federal retirees who transfer money into Individual Retirement Accounts or another financial institution, then, are almost certainly paying more in investment costs, commissions, and other fees.

Retirees can keep their money in the TSP after they retire and move outside retirement accounts into the TSP. Still, the TSP says that 45% of participants who left their federal jobs in 2012 closed their accounts by the end of 2013, resulting in a withdrawal of nearly $10 billion.

In a May report to the Federal Retirement Thrift Investment Board, TSP Executive Director Gregory Long said the program’s “hypothesis” is that “a significant number of TSP participants are leaving the low-cost TSP to move to higher cost IRAs because they are swayed by the financial industry’s marketing efforts which promote the benefits of a large menu of investment choices.”


  • In September, Christopher Anthony Zaal of McKinney was arrested after having been indicted in Collin County for allegedly operating a $2.3 million investment fraud that targeted teachers, administrators, and other school district employees, as well as retirees. The indictment alleges that some school district employees took sizeable lump-sum withdrawals from their Teacher Retirement System pension accounts and sank the money into investments Zaal promised them would be safe and secure sources of retirement income.
  • The two top executives of Houston-based National Life Settlements LLC (NLS) were each sentenced to 10 years in state prison in 2013 for a nearly $30 million scam based on investments in securities that were supposedly backed by the proceeds from the death benefits of insurance policies. The company, whose CEO had been convicted three times of federal offenses, obtained millions of dollars from retired and active state employees and teachers – some of whom withdrew money from state pension and other retirement accounts to invest in NLS.
  • In 2011, the Securities Commissioner entered an Emergency Cease and Desist Order against Addison-based Insignia Energy Group Inc., which marketed investments in oil and gas projects to Texas teachers. Insignia told school district employees the investment could help “replace ‘much-needed income’ in light of ‘looming lay-offs’” due to state budget cuts. Insignia executives offered a “1,000% [g]uarantee” that investors would reap huge monthly returns over 10 years., as in one example the company touted: a $45,000 investment would generate a minimum return of $15,000 a month.
  • In 2006, the Securities Commissioner entered an Agreed Cease and Desist Order against Humble-based Texas Retirement Plans Inc. for acting as an unregistered dealer in the sale of securities to employees of Texas colleges and universities.