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Fund company tailors risks for rollover investing

Updated: May 3, 2013 12:14PM

Originally published: August 7, 2001

You may be one of the millions of Americans who will receive a retirement plan distribution from your company this year, either because you’re switching jobs or are retiring.

Whether the distribution is a large amount or relatively small, if you make the wrong decisions, it could cost you a small fortune in taxes and lost opportunities. Yet your company plan sponsor might be unwilling or unable to give you the guidance you need.

That was the situation facing Tom, who has worked at a large consumer products company for more than 30 years. He’s retiring at the end of this year and was asked to fill out the forms for transferring his retirement fund. Faced with making investment choices for the nearly $400,000 that he hopes will carry him through retirement, he realized he wasn’t prepared for that responsibility.

Tom’s not alone in his predicament. A 1993 survey by the Employee Benefit Research Institute shows that in that year, more than 12.3 million employees received more than $130 billion in lump-sum retirement plan distributions. Only about 41 percent of the recipients rolled over at least a portion of their distribution to an IRA or another tax-deferred plan. Two out of every five recipients spent their entire distribution.

Those who spent part or all of their money lost out in two ways.

First, they paid ordinary income taxes on the money they did not roll over. And recipients under age 59 1/2 paid an extra 10 percent federal income tax penalty for early withdrawal.

Even worse, they lost the opportunity for future tax-deferred gains and growth in their retirement funds.

When Tom asked me for advice, he already understood the importance of rolling over his distribution.

He knew that if he took the check, instead of having it sent directly from his current plan to a new plan custodian, he would face taxes and penalties. (Or if the employer refuses to send a distribution directly to the new custodian, the check must be made payable to the new IRA custodian for your account.)

But Tom was unsure about where to send the money and how to allocate it among various investment options.

While there are a variety of places to turn for help in investing your retirement plan distribution - including financial planners, investment advisers, stockbrokers and mutual fund companies - there is one service designed especially to meet the needs of people receiving plan distributions.

T. Rowe Price, a mutual fund and investment manager with more than $100 billion under management, has created a special Rollover Investment Service designed to help people such as Tom with this huge lifetime investment decision.

The first step is to fill out a questionnaire that will help create a personal investment strategy. You’ll be asked about your investment experience, financial goals, tolerance for risk, and your current financial profile. And you don’t need to know anything about investing to fill out this form.

Sample question: You have $10,000 to invest and have only two investment options. Which would you be more likely to select? Investment X has a 70 percent chance of gaining $2,000 and a 30 percent chance of losing $500. Investment Y has a 100 percent chance of gaining $500. You respond according to your instincts, and they’ll evaluate your risk tolerance.

Within a few weeks of completing the questionnaire, you’ll be given an asset allocation model. That’s just a fancy way of saying they’ll advise you on what portion of your investments should be allocated to stocks, bonds or money market funds. In fact, you’ll be given a specific model portfolio, using T. Rowe Price mutual funds, in which you might want to place your retirement account. But you’re under no obligation to use those mutual funds. You can take this information and use it in any way you like.

The T. Rowe Price mutual funds included in this service are the Blue Chip Growth Fund, Equity Income Fund, High Yield Fund, International Bond Fund, International Stock Fund, New Income Fund, Small-Cap Stock Fund and Short-Term U.S. Government Fund.

The third step is equally helpful and important. If you decide to use the T. Rowe Price funds for your investments, you’ll be given your own designated rollover specialist, who will work with your current employer to coordinate proper transfer of the money to avoid penalties. And your specialist is available to explain the fund selection.

Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp.

E-mail: Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s.

Copyright Terry Savage Productions.

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