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Rolling 401(k) Into Shady Venture Is No Way to Make Up for Lost Time

September 10, 2000|LIZ PULLIAM WESTON

Q: I'm trying to decide whether to leave my 401(k) money in my previous employer's plan or roll the money into an individual retirement account (my new employer does not accept rollovers from other plans; otherwise I would do that). I am 51, in decent health and expect to work another 10 to 15 years. After talking to some financial advisors, I realize there may be ways for my retirement funds to work harder for me and I would like to make up for lost time. One of the advisors suggested I consider investing in technology growth funds. These, I'm told, involve some higher level of risk but can have rate of returns averaging 90%. Is this in fact true? A limitation was that one could not touch these types of funds for six years.

A: Leave your money where it is, at least for now. I'm not exactly sure what this "advisor" is trying to sell you, but it has all the earmarks of a bill of goods.

If your 401(k) has a decent choice of mutual funds, and you've invested in a diversified mix of stock and bond funds, then your money is working plenty hard enough. Don't ask it to work overtime--which is what it would need to do to overcome the added costs of whatever this slickster is pushing.

There is no requirement that you leave mutual funds alone for more than a day. This "six-year" requirement sounds suspiciously like the length of time needed to hold a variable annuity before surrender charges no longer apply. If you're a regular reader of this column, you know what I think about variable annuities in general and about investing in them within an IRA in particular. If you're new to the column, let this suffice: Don't do it.

The "advisor" is exploiting the anxiety you feel about not having saved enough for retirement by dangling these returns in front of your nose. But at this point in the game, you need to be careful with how much risk you take, since you have less time to make up for any mistakes.

And putting all of your retirement money in technology stocks would be a doozy of a mistake. Some technology stocks and technology mutual funds have, in the past, turned in spectacular gains. That doesn't mean they will do so in the future; in fact, many have been suffering miserably this year. Remember: High returns equal high risk, and past performance is no guarantee of future results. Memorize those two concepts, and you'll be on the road to being a smarter investor.

The Los Angeles Times has reams of helpful information, available for free on its Web site, to help you decide how to manage your retirement money. Start with the Invest 101 tutorial series at http://www.latimes.com/invest101. You'll find information about annuities and other insurance products at http://www.latimes.com/insure101. Then take a look at the information about selecting a financial advisor at http://www.latimes.com/finplan. Once you're done, you'll know something about risks and rewards--and the difference between an investment salesman and a real financial planner.

Fighting Trust May Not Be Worth It

Q: I read your Aug. 20 column regarding perpetual trusts. My sister and I have been the beneficiaries of such a trust since 1985, a year that will live in infamy as far as we're concerned. The way my father (an attorney) and his attorney devised this scheme, the principal will not be distributed until 21 years after we die. The money will go to my niece, who wasn't even born when my father died. After living with this folly for 15 years, my sister and I have wondered if it would be possible to break this type of trust, especially since Sis is a single mother and in dire need of income as a result of some rather costly medical expenses. In your opinion, would it be worth it to pursue breaking a trust with a value of $1 million?

A: The "folly" you're living with is not a perpetual trust, but a generation-skipping trust, and it's a common way for the wealthy to save money on future estate taxes.

Generation-skipping trusts give the middle generation--you and your sister--some income while preserving the principal for the ultimate beneficiary--your niece. Although this trust didn't save on estate taxes when your father died, the money in it is allowed to grow so that no estate taxes are due when you, the middle generation, dies. The longer the money can stay in the trust, the more it can grow--at least in theory.

Generation-skipping trusts were so popular among the wealthy that Congress imposed a limit on how much money could be transferred this way. This year, the limit is $1.03 million.

State law limits how long the money can stay in the trust; your father probably had a choice of 90 years or the option he took, which is 21 years after the last middle beneficiary dies.

Now, most people who create a generation-skipping trust do so after they've taken care of the middle generation. Perhaps your father already did that, leaving money directly to you and your sister. If so, your concentration on the money you can't access is, well, rather unseemly.

If he didn't make some kind of bequest to you directly, then yes, you have a beef. It says something about your relationship if he would rather leave his money to someone he didn't know than to the two daughters he did. At best, it's thoughtless; at worst, it's hostile.

Trying to break the trust, however, is a loser's game. The trustees would probably dip into the trust itself for the legal fees to fight you. That would reduce the principal available to your niece and probably trim the income received by you and your sister. Talk to your attorney, who will probably advise you to leave it alone.

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Liz Pulliam Weston can be reached at liz.pulliam@latimes.com.

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