Bad advertising always drives out good--and that's what's happening among financial institutions that offer Individual Retirement Accounts.
Some institutions are overstating the probable amount that IRA buyers will realize from their accounts in various years, or making it hard for you to compare their accounts with IRAs offered by other sellers. This forces their competitors to do the same. As a result, consumers are confused.
Federal disclosure rules are meant to discourage this kind of flim-flam. But the government isn't putting much effort into enforcing its rules. And in any case, the regulations don't cover all of the questionable practices. Among your problems in trying to find the highest-yielding IRA:
* In most states, nothing requires institutions to figure their interest rates in the same way. One bank may offer 11 percent simple interest on a 3 1/2-year certificate, while a competitor offers 10 1/2 percent compounded daily. You might choose the 11 percent certificate because it seems to pay the higher rates. In fact, it is the poorer choice.
At 11 percent simple annual interest, a bank pays $11 annually for every $100 you have on deposit. At 10 1/2 percent compounded daily, a bank may pay $11.23--23 cents more. But how are you to know that the lower stated rate pays the higher yield?
* Federally mandated disclosure statements are supposed to help you see through misleading, or confusing, interest rates on IRA investments. Banks, S&Ls and insurance companies must project how much your IRA will yield if you withdraw your money after each of the next five years and also at ages 60, 65 and 70. In theory, you should be able to compare the projections and find out which institutions actually pay more.
In practice, this often doesn't work. The IRS allows institutions to publish standardized projections at sample interest rates, instead of projecting your yields at the actual rates being paid when you invest. The only requirement is that the sample rate be no higher than the one you are actually getting. As a result, you may not be able to compare the payouts from competing IRAs at present interest rates.
Some banks and S&Ls will automatically give you true projections, or figure them out if you ask. Others won't. An institution that objects to making these calculations might tell you that the law doesn't let them do it--but that isn't true. The law does allow it.
There are two other problems with many of the statements that project what your IRA is likely to yield at stated ages. The standard statement may base its projections on a few selected ages, instead of on your real age at the time you invest. Also, the projections may not subtract penalties for withdrawing from savings certificates before they mature. Both of these practices violate the law, but nothing much is being done about it.
Similar violations may exist in insurance-company projections for their IRA annuities. The disclosure statement may not reveal all the sales fees and commissions, or the withdrawal penalties if you want to switch your funds to another kind of investment.
* The people who sell IRAs may be badly informed about the product and give you bum information. Bank and S&L personnel, for example, may not know such simple things as the size of early-withdrawal penalties, let alone the complex things, such as what happens to the IRA money if you die.
You may be told that the "best" place for IRA funds is the new, high-interest money-market deposit account, without being warned that the high rate may decline next month. You may be told that a 3 1/2-year certificate is the maximum allowed by law, when in fact banks and S&Ls may offer longer terms if they wish.
Although rates vary among banking institutions, you should expect the following range of IRA yields: 9 to 10 percent for a maximum of 30 days on money-market accounts; 8 1/2 percent on six-month certificates; and 9 1/2 percent on 30-month certificates.
In early January, interest rates on deregulated 3 1/2-year certificates ranged from 7.4 percent compounded daily to 11.2 percent simple interest, according to the Bank Rate Monitor in Miami Beach.
Get your own bank's rates for all these time periods (and more time periods if the institutions have a greater selection) before deciding where to put your IRA funds.