Advisor misled clients on fees in Thrift Savings Plan rollovers, SEC says

Advisor misled clients on fees in Thrift Savings Plan rollovers, SEC says
A firm and its owner agreed to a settlement with the SEC over alleged misstatements to customers and a lack of procedures to ensure compliance.
SEP 27, 2024

An advisor who specializes in Thrift Savings Plan rollovers to IRAs for postal workers is in hot water with the SEC for allegedly misinforming clients about fees and total costs.

Since mid-2020, Bohemia, NY-based Federal Prep Advisors and its CEO Michael Kerper advised more than 300 clients to roll a total of over $80 million out of their TSP accounts and into IRAs. Kerper and the firm incorrectly told clients than fees they paid in the TSP were 50 basis points, as much as 10 times higher than they actually were, according to settlement documents the SEC filed on Thursday. Meanwhile, the total fees clients paid at Federal Prep Advisors were often 150 to 200 bps or more per year, the regulator stated.

Those rollovers account for most of the advisor’s business, as its total assets under administration were nearly $91 million among 846 clients as of May 21, according to the SEC filing.

“Federal Prep and Kerper did not adequately consider any total fee comparisons in advising clients to roll assets out of their TSP accounts, nor did Federal Prep or Kerper have an adequate understanding of the total costs associated with the rollover investment strategy that they recommended to clients,” the SEC wrote in Thursday’s cease-and-desist order.

The firm has attracted many of its clients by holding presentations and counseling sessions coordinated by union leadership, according to the SEC.

“These clients are most often at or near retirement age. Federal Prep’s clients generally do not have much investing experience. In addition, the TSP or any other employer-sponsored plan that they or their spouse may hold is frequently the only investment or retirement account that they possess,” the SEC wrote.

“Federal Prep failed to, and Kerper took no action to, adopt and implement written policies and procedures intended to ensure that Federal Prep adhered to the fiduciary duty that it owed to clients, including when providing rollover or other investment advice.”

While keeping retirement assets inside of the TSP ensures participants have low costs, advisors have noted that it can be beneficial to move money to an IRA for greater investment and withdrawal flexibility. How common such rollovers are is unclear – there does not appear to be much data publicly available to show how retirees handle their TSP accounts at retirement.

Neither Federal Prep nor the SEC responded to requests for comment.

Kerper stepped down from his role as chief compliance officer in May and hired new person for that role, according to the SEC. As part of the agreement, the firm will retain an independent consultant to review its compliance practices. Federal Prep is also paying a civil penalty of $200,000, and Kerper is paying a separate one of $80,000.

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