Targeting Pensions and Retirement Savings

Salesman talking to a middle aged couple at home
Salesman talking to a middle aged couple at home

This is a story to make you weep.

Several years ago a Portland, Oregon public schools retiree hired financial adviser Shayne Kniss to help him with retirement planning. The retiree would seem to have had no need for Mr. Kniss's services. He already had a guaranteed life pension coming from his years of public service. But Kniss talked him into cashing out the guaranteed pension and turning the resulting $729,000 into an investment account in his Iris Capital firm. Kniss confidently estimated 8-12% returns, which would have been higher than the guaranteed pension payments.

You can guess where this story is going.

Last September, as reported in The Oregonian, the retiree's $3,500 payments stopped. Iris Capital was tanking. Most of its $5 million capital, collected from 50 people like the public schools retiree, had been invested in a shaky real estate flipping operation that was collapsing.

In the "you can't make this up" category, as the real estate investments were falling apart, Kniss found an attractive new destination for what was left: he started a business in Oregon's newly legal recreational marijuana market. What was left went to pot, literally.

It is doubtful that the Kniss's clients will see any of their money back. They will have to completely depend on Social Security for the rest of their retirement years.

The obvious solution to protecting pensions is to not allow them to be cashed out in the same way that Social Security cannot be cashed out. Social Security fortunately is beyond the reach of financial operators like Kniss. So far, to my knowledge, not even the most ardent Republican foes of the retirement program have suggested making its earned benefits vulnerable to cash outs encouraged by self-interested financial advisers.

Most Americans are not vulnerable to losing pensions in this way for the simple reason that most no longer have pensions. They instead have 401(k)s and IRAs. But they too are vulnerable since those account balances are also targets for financial operators. Indeed, another Kniss client was a retired teacher who invested her $495,000 life savings in Iris Capital.

Iris Capital was part of an enormous business in which financial advisors like Kniss convince retirees to convert their 401(k) savings into IRAs. The business will then charge a fee, often 1% of the balance, to manage the account.

It's easy to blame the victims whose retirement years have been ruined for their gullibility. Kniss was able to convince them that he knew what he was doing and that he was honest. One client reported thinking, "Wow, this guy is really on top of things, he really cares about me."

We don't know whether Kniss was an out and out swindler who took other people's money or was simply irresponsible with their money. Either way he got control of their money from which he made a living. He could have only done that by winning their confidence.

That reminds me of when I worked at a university with a 401(k)-type plan. We were regularly visited by a representative of the plan for "counseling" on our investments. When I questioned whether some of the advice was more in the interest of the company administering the plan than us, a colleague responded, "Oh, but George is such a sweetheart." Being perceived as a sweetheart no doubt helps any salesperson close deals, not to mention swindlers win over marks.

It's also easy to assume that this is an outlier experience, hardly typical of what can be expected from financial advisors, the vast majority of whom believe they're providing useful services to financially unsophisticated clients. In short, to simply believe that Kniss was an atypical rogue financial adviser.

I would rather blame an evolving private retirement system in which American retirement savings are viewed by both small and powerful financial interests as targets for profiteering. The Kniss operation in that respect falls in a larger category that includes financial firms extracting large fees to manage 401(k) accounts, hedge fund operators gaining control of public pension funds, and insurance companies profiting from annuity sales.