When advisors think of 401k fraud, high (and questionable) fees that can take a big bite out of returns over time might be the first thing that comes to mind. And sure, you get the rare bad actors who intentionally and knowingly steal from clients.
But looking at the big picture of how plan participants and retirees can lose big portions of retirement account values to fraud, and the possibilities are expanded greatly. If you are an advisor who worries about your clients being scammed by ill-intentioned outsiders, your fears may be well-founded.
It is estimated that older Americans lose a staggering $2.9 billion a year to an ever-growing array of financial exploitation schemes and scams, according to the recently released U.S. Senate Special Committee on Aging’s 2019 Fraud Book.
Seniors are being targeted by criminals–foreign and domestic–who want to rob them of their hard-earned retirement savings. They are being exploited by strangers over the phone, through the mail, and online. Worse yet, the committee notes, far too many seniors are targeted by family members or by other people they trust.
Many of the scams target funds in retirement accounts like 401ks, IRAs, pensions. In fact, retirement account fraud tripled in 2018, according to the just-released Javelin 2019 Identity Fraud Study, the nation’s longest running independent study of ID fraud.
Retirement accounts were responsible for just 3% of non-credit card fraud in 2017, but spiked to 9% of non-card fraud in 2018, according to the study. Brokerage account fraud accounted for just 7% of all-non-card fraud in 2017, but jumped to 10% of all non-card fraud in 2018.
The report, released March 6 by Javelin Strategy & Research, found 14.4 million consumers fell victim to fraud in 2018. It is a notable drop from the record-breaking 16.7 million victims in 2017, but victims in 2018 shouldered a much heavier burden than those in recent years:3.3 million victims bore some of the liability for fraud, nearly three times as many as in 2016, and victims’out-of-pocket fraud costs more than doubled in two years to $1.7 billion in 2018.
The report notes that credit card fraud has dropped thanks to the adoption of EMV (embedded chip) cards, but says fraudsters have turned their attention to opening and taking over accounts.
“As financial institutions and other organizations modernize account opening processes, it’s paramount that they incorporate tools like document scanning, behavioral risk assessments and digital identity. This will streamline digital applications while challenging fraudsters,” said Javelin Strategy & Research Senior Vice President, Research Director and Head of Fraud & Security Al Pascual.
The report says fraudsters heightened their attacks on peripheral financial accounts like loyalty and rewards programs and retirement accounts including 401ks. These account types, generally considered ‘second tier’ by fraudsters, have traditionally been less prominent targets since they are difficult to monetize.
“Given the agility and tenacity demonstrated by fraudsters in 2018, financial institutions should assume that every account type will be under greater pressure going forward,” said Jim Johnson, EVP, FI Payments and Wealth, FIS (a lead sponsor of the study). “Adequately defending customers from these new security assaults will require the development and adoption of next-generation fraud mitigation strategies.”
Common scams targeting seniors
According to the Senate Special Committee on Aging, “impersonating the IRS” was the No. 1 scam targeting seniors in 2018. Pretty much all of the “top 10” (listed below) involved the potential for draining retirement accounts, as the goal of all these scams is to separate seniors from their money.
Here’s a look at the list of the most-reported scams in 2018, and a closer look at some that may pose the greatest threat your clients.
Top 10 Most-Reported Scams
Based on calls to the Senate Aging Committee’s Fraud Hotline, these are the top 10 most-reported scams of 2018:
- IRS Impersonation Scam
- Robocalls/Unsolicited Phone Calls
- Sweepstakes Scam/Jamaican Lottery Scam
- Computer Tech Support Scams
- Elder Financial Abuse
- Grandparent Scams
- Romance Scams
- Social Security Impersonation Scam
- Impending Lawsuit Scams
- Identity Theft
The Treasury Inspector General for Tax Administration (TIGTA) has called the Internal Revenue Service impersonation scam “the largest, most pervasive impersonation scam in the history of the IRS.”
According to TIGTA, more than 2.4 million Americans have been targeted by scammers impersonating IRS officials. More than 14,700 Americans have lost a total of more than $72.8 million from this scam. At the scam’s peak, there were approximately 20,000 to 40,000 people submitting complaints about it every week. The IRS impersonation scam has been the most frequent scam reported to the Committee’s Fraud Hotline for the past four years.
While there are multiple variations of the IRS impersonation scam, criminals generally accuse victims of owing back taxes and penalties. They then threaten retaliation, such as home foreclosure, arrest, and, in some cases, deportation if immediate payment is not made by certified check, credit card, electronic wire transfer, prepaid debit card or gift card.
The criminals tell victims that if they immediately pay the amount that is allegedly owed, the issue with the IRS will be resolved and the arrest warrant, or other adverse action, will be canceled.
As of September 2018, a total of 130 individuals have been charged in federal court for their roles in the IRS impersonation scam. According to TIGTA, 64 of those individuals have been sentenced and collectively received a total of more than 319 years’ imprisonment.
The illegal or improper use of an older adult’s funds, property, or assets is estimated at the $2.9 billion annual figure, but that is likely very low as many instances are never reported.
Older Americans are particularly vulnerable to financial exploitation because financial decision-making ability can decrease with age. One study found that women are almost twice as likely to be victims of financial abuse. Most victims are between the ages of 80 and 89, live alone, and require support with daily activities.
Perpetrators include family members, paid homecare workers, those with fiduciary responsibilities (such as financial advisors or legal guardians), or strangers who defraud older adults through mail, telephone, or Internet scams.
Money that is stolen is rarely recovered, which can undermine victims’ ability to support or care for themselves. Consequently, the burden of caring for exploited older adults may fall to various state and federal programs.
While some states have laws that require financial professionals to report suspected financial exploitation of seniors to the appropriate local or state authorities, there currently is no federal requirement to do so. Some financial professionals may fail to report suspected financial exploitation due to a lack of training or fear of repercussions for violating privacy laws.
The Aging Committee says it has brought to light many schemes that have defrauded seniors out of retirement savings, and adds “it is deeply troubling when a senior falls victim to one of these schemes, but it’s even more egregious when the perpetrator is a family member, caregiver, or trusted financial advisory.”
A new scam to make the top 10 list for 2018 involves consumers receiving calls from individuals claiming to represent the Social Security Administration (SSA).
While there are several variations of this scam, the caller generally asks for personal information such as Social Security number, date of birth, mother’s maiden name, and/or bank or financial account information. Scammers will try to get personal information by offering to help complete a disability application, apply for a piece of medical equipment, or “help” the victim obtain a new Medicare card.
People should know Social Security will not call or email to ask for personal information such as bank account or Social Security numbers.
Final Thought: While the Senate Aging Committee advises seniors who are targeted to report the suspicious contact using its Fraud Hotline (1-855-303-9470), advisors can help by making clients aware ahead of time what some of these most common scams are, and how to spot them. The 2019 Fraud Book is a tool that can help.