Retirement Savings Plan: New York Attorney General Eliot Spitzer filed a $250 million lawsuit against H&R Block, alleging the tax preparation giant persuaded hundreds of thousands of low-income clients to invest in retirement savings plans that were guaranteed to lose money.

Spitzer's lawsuit claims that 85% of customers who invested in H&R Block's Express IRA paid more in fees than they earned in interest.

The additional fees were the result of more than 150,000 H&R Block customers closing their IRAs over the past four years.

"The conduct described in today's complaint is particularly appalling because many of those hardest hit were working families who struggle to save," Spitzer said in a statement.

Spitzer said his office launched the investigation after receiving information from an H&R Block tax preparer who refused to promote the product.

H&R Block stated it will vigorously contest the lawsuit.

According to H&R Block CEO Mark Ernst, "We firmly believe this is a very good product, designed to serve a population that doesn't have a savings alternative."

Block customers can open an Express IRA for as little as $300, which is lower than the minimum required by most financial institutions, Ernst said, and customers can avoid fees by saving more than $1,000 or by agreeing to contribute at least $25 a month. He also stated that Spitzer had overlooked the Express IRA's tax benefits. Many customers who opened an Express IRA were eligible for the retirement saver's credit, a federal tax credit for low-income individuals.

Ernst said the Express IRA hasn't been profitable for Block. "We've lost $12 million in developing and marketing this program," he said. "We do that because we think by helping our clients to systematically save for the future, we can better serve our clients."

Unlike most IRAs, which invest in stocks, bonds and mutual funds, Block's Express IRA invests in federally insured money market accounts. In recent years, the interest rate on these accounts has lagged the inflation rate, making them an inappropriate investment for a long-term retirement savings plan, Spitzer's lawsuit said.

An Express IRA with a balance of $323, the median amount invested in the account, has earned $3 in interest a year, Spitzer said. That's nowhere near enough to cover the $10 annual maintenance fee, the $15 fee to set up an account and a $15 "re-contribution fee," the lawsuit said. Customers who closed the accounts lost even more because they had to pay a $25 termination fee, the lawsuit said.

Ernst said first-time savers don't want to take risks with their money. "We found that clients are attracted to the FDIC (Federal Deposit Insurance Corp.) feature of the product," he said.

Separately, Lerach Coughlin, a law firm involved in securities litigation, plans to file a class-action suit against Block that will contain allegations similar to those in Spitzer's lawsuit.

The suit will allege that Block, based in Kansas City, Mo., violated the state's consumer protection laws by failing to disclose that customers could lose money in Express IRAs, said Jonathan Stein, lead attorney in the case.

The class-action suit and Spitzer's lawsuit also allege that Block failed to disclose to customers that tax preparers received financial incentives for opening Express IRA accounts.

According to Spitzer's lawsuit, in 2004, tax preparers received $25 for each Express IRA opened, up to a maximum of $100. The reward was in addition to a payment of $5.50 for every Express IRA, according to Spitzer's lawsuit.

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H&R Block's Rebuttal:

"Make no mistake -- we believe in the Express IRA product and are proud of the opportunities it presents for our clients. At a time when the country?s personal savings rate has declined to minus 0.7 percent, we?ve helped 596,000 of our clients begin saving for their future, and more than 40 percent of them had never saved before," said H&R Block Chairman and CEO Mark A. Ernst.

"Currently, our Express IRA savers have accumulated more than $360 million in their accounts plus Saver?s Credit tax benefits of over $50 million. That?s a powerful first step toward ensuring a secure financial future," Ernst said.

"If in the unfortunate event this matter does end up in court, H&R Block will fight vigorously to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option."

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