15 March 2006

Oops, they did it again

H&R Block is back in the news. This time, Eliot Spitzer is suing the company over what the company calls "Express IRAs".

These accounts were created to take advantage of their customers a 2002 tax law change that allowed low income taxpayers that contributed to a retirement account to take a tax credit for the amount they contributed. H&R Block set up these accounts so that their customers could deposit their tax refunds directly into the accounts and would, therefore, get a larger refund.

This seems like a great program that could actually benefit customers. People, especially lower income people, need to save for retirement. This allows them to use money that they never had to fund these accounts. But, the Devil is in the details.

According to Mr. Spitzer, 85% of accounts paid more in fees than they earned in interest. The median account balance of $323 earned $3 per year in interest but paid $10 per year in maintenance fees, $15 to set up the account, and a $15 “re-contribution” fee (whatever that is). Customers also paid $25 if they wanted to close the account. Customers could only invest in H&R Block’s money market account, so they could not get better returns even if they wanted to.

So, these accounts paid a return that was below inflation. That meant accounts were losing purchasing power every single year. On top of that, the median account was being charged around 7.75% in annual fees ($25/$323) in order to earn 1% ($3/$323) meaning the account was slowly being drained by H&R Block.

Brilliant! H&R Block figured out how to capture customers total refunds (albeit slowly) on top of their fees! Throw in funding via Refund Anticipation Loan and these appear to be a blockbuster (for H&R Block at least).

So, in the past few weeks we’ve learned that H&R Block charges outrageous interest rates on “loans” it pushes, cheats on its own taxes, sells your tax data, and now sets up IRAs for its customers that do nothing but enrich itself.

People may say that I'm anti-H&R Block. Really, I'm anti anyone that has a fiduciary duty that repeatedly uses that duty to enrich itself at the expense of people that they know do not know any better, which is apparently what H&R Block is doing over and over again.

Friends don't let friends use H&R Block.

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