Every week on our radio show, Sound Investing, we have a popular feature called the Outrage of the Week. It’s entertaining, and we hope it helps alert investors to some of the ways their pockets can be picked by unscrupulous professionals, institutions and con artists.

Now it’s time to share one of these stories with you.

We stumbled onto this one last month while meeting with a client named Sandy, a 38-year-old fulltime mom whose husband works for an engineering company in Eastern Washington.

The husband owns a nice chunk of his company’s stock through an Employee Stock Ownership Plan funded by his employer, and someday that stock may give them a comfortable retirement nest egg.

But otherwise, this couple doesn’t have much retirement savings, and they need to rely on the 401(k) plan offered by his company. We asked Sandy why her husband had stopped contributing to the plan. Her answer was unsettling.

Sandy went to her credit union for financial advice, and an employee there convinced her that there was no real advantage to the 401(k) because the company didn’t match any of her husband’s contributions.

The advisor wanted Sandy’s husband to stop contributing to the 401(k), even though he would give up a tax deduction. “What she said was totally opposite from everything I thought people should do,” Sandy said. “It was against my better judgment to trust her, but I did anyway.

“She was totally sympathetic to all the day-to-day expenses of a family of five people. She made me feel good about myself,” Sandy said. “She seemed so confident and capable.”

Sandy got good vibes, but rotten advice.

The saleswoman said Sandy and her husband should start Roth IRAs (not a bad idea in itself) with loaded mutual funds (a crummy idea) and said Sandy could borrow money from the IRAs for her kids’ college expenses.

Wrong! Any advisor who suggests “borrowing” from an IRA to pay for a college education just does not know the rules. Sure, Sandy could take money out of her IRA to pay for college costs. But unless she rolled that money over into another IRA within 60 days, the withdrawal would become a permanent distribution. And Sandy could never “repay” that money later to an IRA.

Sandy’s husband’s 401(k) program gives him a chance to keep several thousand dollars a year working for them instead of going to the government in taxes. But the credit union tried to talk her out of taking advantage of that opportunity. I can think of only one reason why: The advisor understood Sandy’s tight budget, and the 401(k) contributions were the only source of money the saleswoman could find to feed her own desire for generating commissions.

Unfortunately, this type of sales pitch is increasingly common at banks, which work hard to win customers’ trust and then exploit the relationships. I guess that’s just business. But for a credit union to treat its members this way is inexcusable.

Credit unions fight hard in Congress to keep their special tax-free status, arguing that their mission is to provide low-cost financial services, not generate profits for shareholders.

Fortunately, Sandy had the good sense to seek a truly unbiased second opinion from us. She’s now back on track, planning to invest $23,000 a year in the 401(k) and some 529 education plans.

 

 

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