|MARK JEWELL, AP Personal Finance Writer|
At the end of last year, IRAs had
Many of these IRA holders are left to their own devices to manage their accounts. Of course, some investors are take-charge types with the ability to maximize savings without taking on too much risk. But in many other instances, portfolio management is hit-or-miss, with little attention to selecting an appropriate mix of mutual funds or other investments.
"Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don't understand what they are and how they work," says
IRAs provide individuals not covered by workplace retirement plans with an opportunity to save on a tax-advantaged basis on their own. The money put into a traditional IRA can be deducted from the accountholder's taxable income for that year, and the money isn't taxed until it's withdrawn at retirement. Also, workers who are leaving jobs can use IRAs to preserve the tax benefits that employer-sponsored plans offer.
With so many IRA holders managing accounts on their own, approaches vary widely, often to the detriment of long-term savings.
For example, surveys by the fund industry's trade organization, the
Perhaps even more surprising, IRAs held by people in their 20s had an average 22 percent in money funds.
Among the reasons cited for the unusually high weighting: Money funds are often a default investment for small rollovers into IRAs from other investment accounts, and IRA holders may be more likely than other investors to keep invested savings readily available for conversion to cash.
Most investors use money funds as parking places for cash that's temporarily kept out of higher-yielding investments. But it's no way to build retirement savings because money funds have offered returns barely above zero for the past four years.
He believes there's a growing need for products to help IRA owners manage accounts on their own. Among the startup firms that have launched in recent years to address this need are online-based services such as Wealthfront,
The latest entrant into this niche is Rebalance IRA, which launched in January. Its advisory board includes
Customers can set up portfolios invested exclusively in ETFs, after a free phone consultation with Rebalance IRA's professional financial advisers to assess their goals and existing investment accounts. Initial calls usually last around an hour.
Because Rebalance IRA's
The service includes automatic portfolio rebalancing to help IRA holders become more disciplined investors.
"People tend to buy when everybody is optimistic and the stock market is up, and sell when everybody is pessimistic and the market is down," Malkiel says. "Rebalancing makes you do the opposite of what your emotions tell you to do."
He cited findings that systematic rebalancing over the last 15 years added 1.5 percentage points to an average annual return of a portfolio invested in stocks and bonds, while reducing volatility.
Schehr, the Gartner analyst, sees significant potential for start-ups like Rebalance IRA if they can market themselves effectively. "A lot of boomers really haven't dealt with how they're managing their IRAs," he says. "And with retirement around the corner, they're finding out they're late in the game to start taking charge of their accounts."
Questions? E-mail investorinsight(at)ap.org
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