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Roth Proves Big Winner for Fund Firms

Aggressive campaigns to capture new investor retirement accounts, especially in Roth IRAs, appear to have produced strong results for mutual fund companies.

"We've seen a huge increase in conversions to the Roth, about a 150 percent increase from last retirement season to this," said Joan Bloom, senior vice president at Scudder Kemper Investments.

All financial institutions, of course, welcome retirement accounts. That is because, for the most part, the funds are invested for the long term and the funds grow for decades. Redemptions are normally made only in emergencies.

"These are assets that stay around for a while," said Chris Doyle, manager of marketing information for American Century Investments, based in Kansas City. "Depending on how old the person is, you could have the money for 30, 40, maybe 50 years."

So, in 1997, when Congress passed sweeping legislation expanding the eligibility of IRA accounts, mutual fund companies jumped at the opportunity. A major attraction was the new Roth account, which allows withdrawals from retirement accounts tax free. By comparison, IRA's are tax-deferred and investors pay taxes when they withdraw funds. In exchange for the ability to make tax-free withdrawals from Roth IRAs, however, investors are not allowed tax deductions when making deposits while they are employed. But the accounts are more flexible than traditional IRAs during pre-retirement years. An investor can withdraw the funds tax- free to finance an education and make a down payment on a house.

In addition, the federal government granted taxpayers some leeway in transferring traditional IRA funds to Roth IRAs. If the transfer was made before December 31, 1998, the tax on the withdrawal could be paid in 25-percent installments over four years, instead of in a single lump-sum payment for the tax year 1998.

To foster investors' use of the new savings vehicle, fund companies filled up websites with educational materials and case studies on the subject. Investor newsletters were produced focusing on the subject. T. Rowe Price and other firms created interactive software which enabled investors to plug in their personal financial data to project the implications of setting up a Roth. American Century sent key marketing personnel to 25 metropolitan areas to conduct informational workshops and discuss the landmark retirement legislation with investors.

The campaign worked.

"On the last day (of 1998) we had people lined up eight deep at the counter of our customer service center in Kansas City," said Doyle of American Century, describing the scene as akin to last-minute income tax filers rushing to the Post Office on April 15. "We were taking the conversion applications right up until the cutoff time."

During 1998, Fidelity converted 260,000 traditional IRAs to Roth IRAs, with about 15 percent of eligible Fidelity customers converting to Roths, the company said. On December 30, nearly 10,000 Fidelity retirement accounts were converted to Roth accounts.

Franklin Templeton reported opening more than 73,000 Roth accounts in 1998 totaling $499.3 million, accounting for about three percent of total retirement assets of $16.9 billion, according to John Hitchcock, president of Franklin Templeton, retirement plan custodian for the fund company.

"Overall, our response was very good. A lot of people were rushing the December 31 deadline," said Hitchcock. About 88 percent of the Roth dollars were converted from traditional IRAs, he said.

"About 43 percent of the Roth business was in December and the bulk of it was clustered in the last few days," said Doyle of American Century. "For the entire year, we saw a 35 percent increase in retirement account activity."

More than half of T. Rowe Price's Roth business for 1998 took place in December and half of the December activity in the last two days of the month, said Rowena Itchon, spokesperson for T. Rowe Price.

"The tax benefits were obviously quite a driver," said Itchon.

The Investment Company Institute has yet to compile statistics on Roth accounts invested with mutual fund companies. But, companies were reporting "very strong interest, particularly as the end of the year approached," said John Collins, an ICI spokesperson.

Despite the Roth IRA's popularity, some fund companies failed to offer Roth accounts by the end of the year, probably largely because they were pre-occupied with the paperwork associated with the year-long conversion of prospectuses to the more user-friendly format mandated by the SEC, said Collins. Last June, fund companies had to begin simplifying those legal documents and have them complete by the end of 1999.

Smaller fund companies were more likely to struggle with the new SEC rules, said Bloom of Scudder. She said her firm hired an outside consultant to oversee the process. Other major companies probably did the same so that normal marketing activities were not affected by the legal requirement, she said.

Meanwhile, the fund companies said the introduction of Roth comes at a time when investors are becoming increasingly sophisticated. Among these more sophisticated investors, who are particularly open to new investment ideas, Baby Boomers figure prominently. Since this group has neglected savings and is now trying to catch up, it is a particularly promising customer pool.

"In general, people are more sophisticated about their financial planning for retirement," said Hitchcock of Franklin Templeton.

Bloom said investors, at a younger age are becoming more aware of the advantages of planning for retirement. Scudder's internal studies show that the 28-year-old has the same average retirement account balance - about $25,000 - as 44-year olds.

"The younger investor is realizing the advantages of compounding of interest, they're learning about retirement accounts through a company 401(k) ... and they're more likely to question whether Social Security benefits will be there for them when they retire," said Bloom. "And there's a lot of information out there."

"We saw a similar (surge of investments) in the late 1970s when IRAs were first introduced," said Bloom. "And now the Roth is opening it up again."