Current Pension Topics
Roth IRA: NYCE Price Right

By JOEL L. FRANK

Q.: You have told us that the investment funds offered by the Deferred Compensation Plan of the City of New York are among the lowest-cost in the industry and have strongly advised us to contribute as much as we can. This does not appear to be the case, inasmuch as Oppenheimer charges me $10 annually for my Roth IRA. What is going on?

J.L.

A.: Rest assured your Roth IRA investment with Oppenheimer Mutual Funds is costing you substantially more than a similar investment with the NYCE IRA. This is so because Oppenheimer is a for-profit business enterprise while the Deferred Compensation Plan/NYCE IRA is operated on a non-profit basis. To the annual account fee of $10 you must add the expense ratio of the individual Oppenheimer Fund you invested in. In your own best interests you should know, before you invest in a fund, all the fees you will be responsible for, not just an incidental account fee of $10 per year. You should go back to the Oppenheimer salesperson to whom you paid a commission to acquire the fund, and ask him/her to tell you in writing the expense ratio of the fund you invested in. This should have been fully disclosed to you at the time you wrote out your check for the investment.

Having said that, here is an example of the fees associated with a $10,000 NYCE IRA invested in a Pre-Arranged Portfolio charging 0.24 percent as an expense ratio: $50 annual administrative fee deducted from your account, $3 (0.0003 X $10,000) annual administrative fee charged to investment fund, and $24 (0.0024 X $10,000) for the expense ratio of the Pre-Arranged Portfolio. $50 + 3 + 24 equals a grand total of $77 in annual fees. $77 divided by $10,000 equals a grand total expense ratio of 0.0077 or 0.77 percent. The average retail mutual fund, such as those distributed by the Oppenheimer firm, charges about 2.00 percent, or $200 on a $10,000 investment.

I do not believe in investing in just one asset class. The major asset classes are: equities (common stock), fixed income securities (bonds), and cash (stable value). I believe in spreading the inherent risks of investing among the 3 classes. This is called asset allocation. Rather than doing it yourself (which is your right) I would rather have the experts hired by the Deferred Compensation Board do it for you. Why? Because as you get older, your exposure to equities/common stock investing should be reduced and at the same time your exposure to fixed-income investing should be increased. Are you going to make sure that every three months, as you age, that your exposure to common stocks is actually reduced while your reliance on fixed-income investing is increased? I would not bet on you doing what is required to be done in your own best interests.

The experts managing the newly designed Pre-Arranged Portfolios give you not only the appropriate asset allocation based on your age, but every three months automatically shift your investment emphasis from common stocks to fixed-income securities. Effective with this issue of Current Pension Topics, you now can choose from 12 Pre-Arranged Portfolios.

To gain the full advantage of appropriate asset allocation, as well as an automatic and gradual shift from stocks to bonds as you age, please invest all of your money in one and only one Pre-Arranged Portfolio. If you are investing in one or more of the core investment funds in addition to a Pre-Arranged Portfolio, you are shooting yourself in the foot.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .