IRA incentives help savers, but they need to keep a close eye on fees

IRA matching and bonus programs won’t make everyday investors millionaires, but they help — provided clients faithfully contribute and make intelligent investing decisions.
Fidelity Investments last week launched its matching contribution program for individual retirement accounts.
The firm has a sliding scale for new or existing customers who transfer Roth, traditional or rollover IRAs to Fidelity: Those who transfer over $500,000 will receive up to a 10% match on future contributions for three consecutive years. Those who bring over smaller amounts are also eligible for a reward: At $100,000, a client can receive a 2.5% match on future annual contributions, while at the $10,000 level, the match is 1%. Direct rollovers out of 401(k)s or 403(b)s aren’t eligible.
There are other bonus programs out there, too. Sammons Retirement Solutions has a mutual fund IRA product called LiveWell Plus that credits a 3% account bonus on contributions made within six months of opening the IRA. The catch, however, is that clients need to stay in the product for at least six years.
Readers might also be familiar with rollover incentives offered at firms that provide retail brokerage services, as well. With respect to rollovers, TD Ameritrade offers existing customers up to $2,500 cash, plus 500 free trades for 60 days. Charles Schwab & Co. recently offered its Schwab Investor Reward — a cash bonus of up to $2,500 for qualifying deposits into a retail brokerage account, including IRA rollovers out of a retirement plan.
Retirement researchers noted that encouraging people to save helps even the smallest accounts, but clients need to be aware of additional factors that could erode whatever incentive is offered, including fund fees and, in the case of the brokerage accounts with bonuses, trading expenses.
“My suspicion is that you’re paying very large fees,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, said. “This is an attractive lure, and I think it’ll be an effective lure, but it’s not clear to me that it will make people better off.”
CONTRIBUTION MATCHES VS. FEE REBATING
Lauren Brouhard, senior vice president at Fidelity, pointed to three suggestions for clients to get the most they can out of the IRA matching program: make consistent and generous contributions, get invested, and develop a savings plan.
“Hopefully this program inspires people to save more, and motivates them to take action now,” Ms. Brouhard said.
With respect to fees and their role in longer-term savings plans, she added that “generally speaking, investors should review and compare the different types of fees before making decisions regarding their IRAs or other accounts, where they’re doing business, and the products they buy in their accounts.”
David Blanchett, head of retirement research at Morningstar Investment Management, noted that if someone were to roll in $500,000 into one of these Fidelity accounts and received the 10% match on $6,500 — the maximum contribution of $5,500 plus a $1,000 catch-up contribution — in the following three years, then the match would only total $1,950. That match would work out to 0.39% of the account value over that three year period.
Mr. Blanchett likened the match contribution to a fee rebate, noting “a fee reduction of up to 40 basis points doesn’t sound as catchy as a free match.”
But the real impact on everyday investors comes from the encouragement to continue funding the IRA and to allow compounding interest to do its work on even modest contributions.
“People aren’t economically rational, so someone who is hesitant might be encouraged to save more,” said Mr. Blanchett.
“To be honest, when I think of who needs to save more, it’s the average American — the person who is more geared to receive that retirement savers’ credit,” he added.
WHO BENEFITS MOST FROM MATCHING PROGRAMS
Naturally, the clients with the largest IRAs and the ability to overfund them are the ones who’ll receive the best match, but upcoming research from Hearts & Wallets demonstrates that when it comes to workplace savings, middle income earners reap the most benefit from matching programs.
For wage earners who make less than $48,000 in income, a 100% employer match at a 6% contribution level will boost the average deferral rate by a multiple of 1.6, compared with workers who didn’t have a match according to Laura Varas, co-founder of Hearts & Wallets. For those earning over $96,000 in income, deferral levels held steady, even with the match.
The biggest difference was with the individuals who earned between $48,000 and $96,000: They deferred at 2.5 times the rate of the workers who had no employer match.
“Low income people are dealing with day-to-day needs, while people earning $96,000 were going to save anyway,” said Ms. Varas.
She noted that the biggest hurdle for everyday savers is getting to that first $100,000 in savings. “This isn’t very much money for the average account, but it’s a behavioral pat on the back” Ms. Varas said of matching programs.
DON’T FORGET THE IMPACT OF FEES
Just as savings that starts out meager can grow with the help of steady contributions and compounding interest, investors need to be aware of the ill effect high fees can have on those accounts over the long term.
“Optimization and giving you the best account value is going to be dependent on the mutual funds that you pick,” said Bill Lowe, president of Sammons Retirement Solutions.
“For some people, maybe you want a product that has more value-add to it,” said Ms. Varas. “The point is that as long as you’re saving money, it’s an exciting innovation. But I agree that you wouldn’t want costly funds to undo the benefit [of the bonus].”