Tax law changes open new doors for mutual funds
Boston — The mutual fund industry is waiting for New Year's Day with the eager anticipation children reserve for Christmas. Like a child who has peeked into his parent's closet, the industry already knows the shape of its gift. The tax bill President Reagan recently signed will vastly increase the number of potential customers for individual retirement accounts (IRAs) as of Jan. 1.
An IRA allows an individual to put funds in an investment account, including a mutual fund, and deduct the contribution from his taxable income.
As a result of the tax law changes, mutual fund executives have visions of vastly expanded client lists dancing in their heads and are laying plans to realize their hopes.
"There is tremendous potential in this new situation," say Harry J. Guinivan, associate public information director for the Investment Company Institute, a mutual funds trade group.
"Almost everyone is eligible for an IRA now," says E. F. Hutton & Co. vice-president Gary J. Strum, "as long as they are not foreign citizens, over 70 1/2 years or age, and do not get all their income from interest and dividends."
The recent tax bill did significantly broaden the IRA market by extending benefits to workers whose employers have qualified pension plans. Before the 1982 tax year only employees whose corporate pension plans did not meet government standards could get a tax deduction for money socked away in an IRA.
Under the new tax law, IRAs also pack a bigger tax saving wallop. Under the old tax law, the maximum deduction had been $1,500 or 15 percent of pay, whichever was less. If a joint account were set up with a nonworking spouse, the limit was $1,750.
But on 1982 tax returns, full-time workers can contribute $2,000 and joint account IRAs can receive contributions of up to $2,250. People with part-time jobs will be able to deduct 100 percent of their income, up to $2,000.
While sales will be helped by the fatter IRA deductions the new tax law provides, mutual funds expect the bulk of their new sales to result from the fact it now will be easier for brokers to find qualified customers.
When a broker had to call a raft of prospects to find someone without a qualified pension plan before he could begin a sales pitch, "brokers did not see much incentive in offering an IRA account," says Richard Vesely, marketing vice-president at Delaware Management Company, a Philadelphia based mutal fund packager. Since the maximum individual IRA sale was only $1,500, the resulting commission was only $100 or so.
After Jan. 1 "there will be a mass audience with more prospects for a broker to go after," Mr. Vesely says. So while the commission per sale may not be significantly higher, sales prospects will be easier to find."
Still, mutual fund salesmen will have to battle for IRA sales. The funds have been competing for IRA accounts since the IRAs were first sold in 1975. But until now the funds came up with a lump of coal while commercial banks and savings and loans got the investment gems. As of September, 1980 savings and loans had 43 percent of the $1.9 billion on deposit in IRA accounts while mutual funds had only 4 percent of the total.
In trying to reverse those market share figures, investment companies first will stress their money market funds, which on average are paying interest of 17 .2 percent. "They are uppermost in people's minds now and will be easiest to sell," says Delaware Management executive Vesely.
Savings and loans also offer certificates tied to money market rates. But mutual fund executives say they alone can offer IRA account holders the chance to swing into stock or bond funds if the equity market improves.
"When have the flexibility to blend and control risk," says Ronald Lynch, senior partner at Lord Abbett & Co. "Any day you want to switch [into a stock or bond fund] you can."
In addition to relying on brokerage house sales personnel, some investment companies will also be rallying their in-house sales team to go out after IRA accounts. "We will be using out sales force to contact corporations," notes Victor Kramer, retail products manager for Fidelity Management & Research Company in Boston.
Mutual fund packagers are eager to sign up corporations which under the new law can allow employees to make voluntary contributions to pension plans instead of funding an IRA. Investment company salesmen argue that offering employees a mutual fund-based IRA would relieve a corporation of the adminstrative hassles and fiduciary responsibilities connected with voluntary pension contributions.