THE MUTUAL fund industry has helped millions of Americans to save for their golden years. Then it can find itself left out when workers change jobs.
One of every two people who change jobs spend some or all of the money they've salted away for retirement, according to a recent survey by the Employee Benefit Research Institute, a Washington-based public policy think tank.
It doesn't matter if it's $800 or $80,000. The hard-earned wad goes to buy a house, take a vacation or pay off bills.
While lump-sum distributions are often small, they add up to an estimated $150 billion each year. And it is these dollars that the giant mutual fund industry wants.
"The dollars involved are huge," said Paul Yakoboski, senior research associate with Employee Benefit Research. Employee Benefit conducted random telephone interviews with 1,000 people in August and asked them whether they had received a lump-sum payment from an employer in the past three years.
Fifty percent said they spent some or all of the distribution, 46 percent said they rolled it over to a new plan, 27 percent put it into another savings vehicle and 3 percent said none of the above.
Some respondents gave more than one answer because they spent some of the money and saved a portion of it.
"It is a scary fact; it is a disappointing number," said Meredith C. Callanan, a marketing executive with T. Rowe Price Associates Inc.
The big mutual fund companies such as Boston-based Fidelity Investments and Baltimore's T. Rowe Price are using advertising and direct marketing to persuade job changers to keep their nest egg, no matter how small, and roll it over into one of their individual retirement accounts.
"It is important business," said Judith McMichael, vice president of retirement services of Fidelity Investments, the nation's largest mutual fund company.
"We have a permanent media campaign going on. We constantly have a presence. We try and be out there all of the time."
Fidelity currently manages $469 billion in its mutual funds. About half of the money is investors' retirement funds, and a large percentage of that money has come from people who have changed jobs and rolled over their money, McMichael said.
T. Rowe Price has accepted rollovers for years, of course, but this year it developed a new product designed to help job changers decide how to invest their money. It launched the "rollover investment service" in December as a pilot. About 50 investors who have changed jobs have rolled money into a Price IRA under the program.
"It is right on target," Callanan said.
Price began offering the program because clients who were changing jobs wanted to know what to do with the money in their 401(k) plans.
"It is a huge market and it is only going to get larger as more and more companies offer defined contribution [retirement] plans," Callanan said.
Those who change jobs can leave their money in their 401(k) plan, roll it into their new employer's retirement plan if one is provided, put it into an IRA, or spend it.
If they spend it, they're zapped with a 20 percent withholding fee by their employer, a 10 percent early-withdrawal penalty, and they must pay income tax on the money because it has to be reported as income.
"The world of today is not a world where people get a job and stay in it for 30 years," McMichael said. "But taking the money out is not good. The older you get the more expensive it is to save."
A 25-year-old saving $2,000 a year earning 9 percent interest would be able to retire with $700,000. But a 45-year-old would have to save more than $13,000 a year to end up with the same amount.
"It is just not doable," McMichael said.
"If the person has that rollover, definitely don't spend it. That is a nest egg that can't easily be built up again."
Each mutual fund company administers its rollover program differently.
Fidelity offers free seminars on rolling money over to an IRA and it sends prospective clients kits on how to transfer their money.
Price charges a $100 fee for its program, but the fee is waived if the money is invested in a T. Rowe Price IRA.
A customer fills out a questionnaire designed to determine his or her financial goals, investment experience, tolerance for risk and financial status.
The information is analyzed by investment professionals and a computer program that scores an investor's stomach for risk. The investor is given advice by Price financial planners and portfolio managers.
"This is going to be the core retirement capital," Callanan said. "To invest it properly is critical."
Pub Date: 6/30/97
