IRA providers are waving cash; should you take it?

Back in the day you could walk into a bank to open a new account and walk out with a free toaster.

Today, you can walk into the office of a big mutual fund company or bank and get a wad of cash if you open a retirement savings account. You can get anywhere from $50 to $2,500 for rolling over a 401(k) into an Individual Retirement Account, or just by moving an IRA from another financial institution, depending on how much you roll over.

Nobody doesn’t like a gift of cash. But since none of these companies are in the habit of giving away money, let’s stop to ask: what’s the catch?

IRA providers use cash incentives to acquire new customers – it’s a relatively inexpensive form of marketing compared with advertising or direct mail. The latest marketing twist comes from Fidelity Investments, which is offering an “IRA Match” program to new and existing customers who transfers a Roth, traditional or rollover IRA to Fidelity (rollovers from 401(k)s aren’t eligible).

Fidelity will match your contributions up to 10 percent for the first three years that the account is open – although you’d have to rollover a whopping $500,000 or more to get that level of match. For most people, the match will be much smaller — a rollover of $50,000, for example, would qualify for a 1.5 percent match in each of the next three years. That’s worth $260 over three years if you max out your annual contributions at $5,500, or $290 if you’re over age 50 and eligible to make additional $1,000 catch-up contributions.

In my Reuters column today, Fidelity explains that the program is designed to encourage retirement saving – much like employer matches in workplace plans. But at the end of the day it’s another way of providing a cash bonus for rolling over.

Should you take this type of money and run? Sure – with two important caveats. First, don’t do this by deserting a top-notch 401(k) plan. And if you do shift, make sure to make the least expensive investments possible.

“It’s a free lunch, but not if you yield to the temptations,” says Mitch Tuchman, managing director of Rebalance IRA, a wealth management firm that offers low-cost IRA portfolio management. Mutual fund companies hope to earn back the cash incentives by selling high-cost active funds and managed portfolio services, he thinks. “You have to avoid falling prey to the sirens of active management.”

But you can buy inexpensive passive index funds or exchange traded funds (ETFs) through any of the providers’ brokerage services, Tuchman notes. To illustrate, he suggested a portfolio composed of four Vanguard ETFs that each have fund fees below 20 basis points: Total U.S. Stock Market (VTI), Total International stocks (VEU), U.S. Bond Market (BND) and Total International Bond (BNDX). Simply pick your allocation.


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