RACE IS ON TO SELL ROTH IRA: PRU, FIDELITY LEAD THE WAY, BUT BLITZ MAY PROVE A BUST

Thanks to Prudential Insurance Co. of America, the 57,000 motorists who cram through New York City’s Lincoln Tunnel each day are greeted with a billboard over the entrance posing the question, “Which IRA is right for you?”

Newark, N.J.-based Prudential is one of a number of big brokerages and mutual fund companies – most of them direct marketers – that have kicked off aggressive campaigns to promote the new Roth Individual Retirement Account, which became available in the New Year.

Unlike tax-deductible IRAs, the Roth does not offer any breaks when contributions are made, but earnings growth – and post-retirement payouts – are tax-free.

Although some firms began advertising almost as soon as Congress passed the tax law that created Roth IRAs last August, many held back until the first quarter, which is when most people scramble to create IRAs before filing their tax returns.

Those who track advertising in the financial services industry say it’s too soon to tell exactly how much is being spent to market the Roth IRA, but anecdotal evidence suggests that it’s big bucks.

The multimedia campaigns range from $1.3 million television spots that were slated to run during yesterday’s Super Bowl to three-page spreads in the Wall Street Journal that come with a $500,000 price tag. To kick off itsblitz, Boston-based Fidelity Investments even persuaded the father of the Roth IRA, Senate Finance Committee Chairman William V. Roth Jr., R-Del., to make a well-publicized appearance at its Wilmington, Del., branch on the day the company signed up its first Roth IRA customer.

Many companies began drumming up interest – or perhaps fueling confusion over the product – last year through direct mailings and Web sites offering free help in the form of worksheets, special calculators and educational materials.

“One thing we decided to do was hold back on what one would call the heavy blast advertising and do more of a soft-sell,” says Tracey Gordon, a vice president at Charles Schwab & Co. Inc.

But the San Francisco-based discount brokerage – which in the first 15 days of January surpassed IRA sales for the entire month of January 1997 – is now set to unleash a hard-hitting barrage of broadcast and print ads.

The Roth is expected to give the $1.3 trillion IRA market, which got hammered in 1986 by federal legislation that imposed restrictions, a big boost.

There will be account maintenance fees, which can be as much as $30 yearly, plus investment management charges. Brokerages and sales reps will share sales charges.

Not surprisingly, many of the image ads stress that consumers should not venture to figure out which IRA option is best for them without the help of a financial adviser – many of whom are already armed with special software programs provided by the big marketers.

“In everything we do, we recommend that the public seek the advice and counsel of a financial consultant because (the Roth IRA) is very complex,” says Wendell Collins, a vice president of Merrill Lynch & Co., which began running ads the day after Congress created the option.

Wait-and-see attitude

Despite the hype, not every financial services firm and planner is convinced that the Roth IRA is the best thing to happen to the retirement savings market.

Virtually absent from the marketing frenzy are broker-dealers that serve intermediaries, such as independent planners. Fund shops that deal mostly with planners, for example, haven’t exactly been aggressive.

“There are a few (big) companies that are aggressively promoting it, and most are sitting in the background, sort of waiting to see if there is a payoff here,” says Louis Harvey, president of Dalbar Inc., a Boston-based financial services research firm. “Next year, depending on the (sales) outcome of this year, you’ll see people either shrug and move on or aggressively go after it.”

For many players, the biggest question surrounding the Roth IRA – which, like the traditional IRA, has a $2,000 limit on annual contributions – is whet
her the revenues they can generate will be worth the time and expense to sell it, notably the arduous tasks of explaining the product to consumers and determining which investors qualify. (The issue is even more pronounced with the new education IRA, which has a maximum contribution of $500 a year.)

Furthermore, advisers face the thorny issue – or what some might call a possible conflict of interest -of recommending that investors shell out the money needed to pay the taxes that go along with converting a traditional IRA into a Roth, which could mean depleting the assets they place with the adviser.

The blow is softened a bit by the fact that taxes due on conversions made this year can be spread out over a four-year period – which should only heighten this year’s push to sell the Roth.

To get around the tax dilemma, some planners are advising clients to pay the upfront taxes using non-tax-deferred assets – such as bank savings – when converting, or to leave existing IRAs alone and start a Roth as an added savings vehicle.

Proceeding with caution

Some planners and their clients fear the benefits could be wiped out by future legislative changes – which, at worst, could include a complete reversal by Congress or the move to a flat tax or national sales tax. Congress already is considering a technical corrections bill that would levy penalties for early withdrawals, an indication that the Roth IRA remains a work in progress.

“Some people are just distrustful of the tax law system, and they say, ‘Why should we pay taxes earlier than we have to under these assumptions that might not be valid?’” says Mark Smith of M. J. Smith & Associates, a Denver-based firm with $300 million under supervision.

Taxes aside, some planners say the Roth IRA won’t mean big business because they can’t pitch it to their high-net-worth clients. Individuals earning less than $110,000 a year and couples making up to $160,000 annually are eligible for the Roth IRA.

“The tax-free accumulation feature is fabulous,&q
uot; laments Mr. Smith, “but unfortunately a lot of my clients have the (income) restriction.”