Fraud Conviction: Leaving TSP to Invest in Variable Annuity With $1.7 Million in Commissions

A scam targeting TSP investors nearing retirement by convincing them to sell their TSP funds and purchase high-cost variable annuities has come to an end.

TSP is Nation’s Largest 401(K) Type Plan

How safe is your investment in the Thrift Savings Plan (TSP)? Could an investor make more money by investing outside the TSP?

The TSP is now effectively the largest 401(k) type of retirement plan in the United States. Even with the stock market tanking in 2022, the TSP still had almost $707 billion in the plan at the end of June and there were more than 6.6 million participants.

A pot of money this big will attract con artists. The TSP has been cited as a model retirement plan (before the mutual fund window) because it is reliable, easy-to-understand, and use, and provides a good range of index funds for investors. This does not mean investors in the TSP can avoid fraudsters.

Why would investors leave the TSP? Any organization with this many investors and this much money will be a target for sophisticated con artists. No doubt, a few hundred TSP investors thought they could have a safer investment with a bigger return by cashing out their TSP investment and putting their money into annuity investments. What could go wrong in this scenario?

A Fool and His Money are Soon Parted

The phrase “A fool and his money are soon parted” has been around a long time. It was first recorded in 1573. Hindsight is always good, but it is human nature to seek out a better opportunity, even if it sounds too good to be true.

According to the Securities and Exchange Commission (SEC), an organization using the name Federal Employee Benefits Counselors targeted TSP investors who were nearing retirement and who had a lot of money invested. These investors were already successful. But, if you have $500,000 in your TSP account, wouldn’t you prefer to have a million? Perhaps two million? More money could be a more enjoyable retirement.

The brokers in this case created the impression they were affiliated with or approved by the federal government. In some instances, according to the SEC, investors were led to believe that their funds would be invested in a product that was offered, vetted, or specifically selected by the TSP. 

The TSP is a low-cost plan for investors. Convincing someone to leave the plan would not be successful if they thought it would cost them more in fees. The brokers in this case collected more than $1.7 million in commissions by selling these federal employees annuities with high commissions using money taken from their TSP accounts.

The con men sent material they wrote that obscured the investment being sold was a privately issued variable annuity with no connection to the TSP. The sale would be processed through a private brokerage firm with which the brokers were associated. The brokers sold approximately 200 variable annuities with a total face value of approximately $40 million to federal employees using their TSP money.

The annuities had a much higher cost structure compared to alternative investments. The annuities had a surrender-fee charge of up to 8.5%, triggered by withdrawing funds within the first seven years of the investment, resulting in potentially devastating consequences for many of the soon-to-be retirees. Overall, the annuities had a much higher cost structure than alternative investments.

According to SEC official Aaron W. Lipson, Associate Director of the SEC’s Atlanta Regional Office quoted in a press release issued in 2017:

As alleged in our complaint, these brokers were motivated by the prospects of higher commissions as they targeted federal employees age 59½ and over and intentionally obscured important details when recommending variable annuity purchases. They even allegedly excluded the words ‘variable annuity’ from some materials they shared with TSP account holders.

Jury Decision

In March 2022, a jury in U.S. District Court for the Northern District of Georgia found a former agent of the company, Jonathan Dax Cooke, 39, and the Atlanta-based company he founded committed fraud in a scam that was targeting federal employees. Hundreds of people apparently fell for it.

The company posed as federal investment counselors selling variable annuities to hundreds of federal employees who were at or near retirement age. Their goal was to lure federal employees into rolling over large amounts of money from their TSP accounts into variable annuities that paid high commissions to the salesmen.

Final Judgment Against Former Broker

In August, the court issued a final consent judgment against Jonathan Dax Cooke. The three other individual defendants named in the litigation settled before the trial. The jury’s decision issued in March 2022 ruled in favor of the SEC on all counts against Cooke.

The decision bars Cooke from serving as an officer or director of some types of publicly-held companies. It also ordered him to pay disgorgement of $396,409 and a civil penalty of $103,591. Disgorgement requires a defendant to give up all profits made as a result of illegal or wrongful acts, regardless of the actual loss incurred by the plaintiff. Disgorgement is an equitable remedy issued by the court, not the jury.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47