A California judge has cracked down on a company that provides upfront cash in return for future military pension payments, awarding a total of $2.9 million to 63 veterans in a class action lawsuit.
In an Aug. 22 ruling, Judge David C. Velasquez said the agreements that the retirees had signed violated federal law against "assigning" military pensions to other parties. He called the pension buyouts "unscrupulous and substantially injurious."
The company, Structured Investments, maintains that its practices are legal. A company official did not return calls seeking comment.
The case, in Orange County Superior Court, is a reminder that retirees need to think carefully before signing onto often high-cost deals that tap their pensions in advance.
About 1.5 million veterans received about $40.3 billion in pension payments from the Pentagon last year, making them an attractive target for companies that place ads online and in trusted military publications. No one knows how many veterans put their pensions up for ready cash.
"These cash payments are rip-offs, providing the veteran only a fraction of what the benefits are actually worth," Ohio Attorney General Mike DeWine says in a resource guide for veterans and military personnel. "They are illegal."
Efforts to alert military retirees to the dangers could get a boost from the new federal Consumer Financial Protection Bureau. Holly Petraeus, wife of Army Gen. David H. Petraeus, heads the bureau's Office of Servicemember Affairs.
She told a congressional panel earlier this year that her office will try to educate military personnel on careful financial practices. "One way to help is to enforce the laws that are already on the books to protect them, and to hold to account those who ignore them," she said. "Another is to write new rules when needed."
Petraeus previously led the Better Business Bureau Military Line program. There, one of her tips was: "Guard your military pension. Don't fall for scams that claim you can draw on it early for a fee."
Louis Kroot, M.D., age 62, and his wife Kathie, 59, of Lexington, Ky., learned the lesson the hard way.
Deeply in debt because of family medical and tax bills, Kroot, who served 23 years as a doctor in the Navy, answered an ad in a military magazine for a company called Retired Military Financial Services, also known as Structured Investments. The ad offered quick cash from his military pension.
He and his wife acknowledge that they signed a contract without investigating the total cost.
The Kroots told their story to the Center for Public Integrity, a Washington, D.C.-based nonprofit investigative news organization, which did the math.
In return for almost $92,000 in cash, Kroot signed away 95 months of his pension, worth $242,753, the center reported. Plus, he had to purchase life insurance with Structured Investments as the beneficiary, pay monthly management fees, and agree to hand over two more years of his pension if he missed a payment. In all, Kroot is paying the equivalent of a 30.7 percent annual interest rate, according to the center.
Kroot was not part of the California lawsuit. He's still paying off the buyout by depositing his retirement check in a joint checking account from which the company then withdraws the money.
According to the judge's decision, Structured Investments argued in court that the joint account arrangement means that there is no assignment of a pension, because the pensioner could still tell the government to send the money elsewhere.
The company can appeal the judge's decision.
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Marsha Mercer is a Virginia freelance writer covering public policy issues.