``Become a millionaire by the time you retire.'' Placards prominently displayed in the windows of commercial banks, credit unions, and thrift institutions proclaimed that message only four years ago, when government tax laws first permitted employed individuals to open tax-free retirement accounts.
In smaller print, the seductive ads charted out the compound growth that the then-$1,500 per year IRA contributions would achieve at double-digit rates. The promise: That a 30-year-old opening an IRA would be catapulted to millionaire status by the time he was 65, merely by continuing to make risk-free deposits at that institution.
But those were the days when interest rates were stratospheric and five-year certificates of deposit were available in the 15, 16, and 17 percent range, and money market funds competed with slightly higher yields.
``Many banks and S&Ls were even offering outlandish rates like 18 percent and 20 percent for short periods as a come-on for IRA depositors,'' recalls Robert Thomas, executive vice-president and head of the retirement planning department at Advest, a Hartford, Conn., brokerage house which is seeing an increasing amount of IRA business.
Today the average investor is hard pressed to find yields at banks anywhere near their former appeal. And while some IRA depositors are continuing to use savings institutions, recalling with nostalgia the heady rates they once got, more and more are turning to alternatives.
Some are opting for brokerage houses, which make available a plethora of investment vehicles -- zero coupon bonds, equities, mutual funds, and traditional bonds as well as certificates of deposit. Others are choosing families of mutual funds, thereby taking the burden of individual responsibility for making their retirement nest egg grow. Or diminish.
``People are increasingly willing to take responsibility for their own financial affairs,'' says Larry Stupski, president and chief operating officer of Charles Schwab & Co., the San Francisco-based discount brokerage owned by Bank of America. Schwab claims over 100,000 IRA accounts. ``With the increased phenomenon of divorce and other social change, people are increasingly willing to concentrate on financial self-reliance,'' Mr. Stupski says.
The statistics bear this out: The percentage of IRA accounts at banks, thrifts, and savings and loan associations has been shrinking, while brokerage business IRA accounts have been on the increase. Last year the brokerage business accounted for 13.6 percent of all IRA accounts, compared with 12.5 percent the previous year.
Meanwhile, savings and loans' share of IRA accounts slipped from 26.3 percent in 1983 to 24.8 percent in 1984, and mutual savings banks' portion dropped from 6.3 percent to 5.5 percent. Evidence indicates that the brokerage house and mutual fund portion of the IRA universe is growing even faster this year.
``We have seen the number of IRA accounts triple in the past year,'' offers Glenn Sinischko, marketing manager for retirement planning at Cleveland-based brokerage house Prescott, Ball & Turben. Mr. Sinischko attributes the growth to two factors: An increased sales effort by his firm, coupled with the fact that investors have accumulated anywhere from $8,000 to $10,000 in their IRA accounts and are looking to consolidate their various IRA accounts under a single umbrella. In addition, says Advest's Thomas, the larger accounts enable investors to justify the $30 custodial fees that most brokerage houses and mutual fund families charge to administer IRAs.
Furthermore, says Donald Underwood, vice-president and manager for retirement plans at Merrill Lynch, Fenner & Smith, ``a greater number of IRA investors are interested in equities than last year, because the stock market has been so nice since the beginning of the year. They are picking growth stocks or a mutual fund which has growth as its aim.''
The most prevalent investment in IRA accounts over the past year, however, is zero coupon bonds, whether issued by corporations or by the United States Treasury and put in packages known as TIGRs or CATS. According to Mr. Underwood, the zero coupon vehicle is appealing to IRA accounts because of their low initial purchase price, and the fact that the interest can compound free in an IRA, while in a taxable account that interest would be taxed annually despite the fact that payments are not received by the investor until the bond matures.
Says Underwood: ``The whole concept is like the old government savings bond. People understand that there is a precise rate of return. You can invest $250 for 10 years and receive $1,000 at the end.'' Right now corporate zeros are yielding some 11.70 percent.
Of course today's attractive yield can be tomorrow's dis appointment, should interest rates rise substantially over the next few years. But, notes Advest's Thomas, that is one of the big advantages of a self-directed IRA. ``If you feel you have made a mistake and want to change your mind, you have the flexibility to do it. You can reverse your decision at a brokerage house without paying a penalty, as you would on certain types of bank certificates.'' The only penalty the investor has for changing his investment at a brokerage house is the commission -- which incidentally, is not tax deductible.
Flexibility can be a true boon to the IRA investor who has chosen wisely and wants to profit. For instance, continues Thomas, ``a lot of IRA money was put into zero coupon bonds with a 13.5 percent yield last spring. Since rates have fallen significantly, investors got a very good gain on the principal. They may now think it is time to switch to equities, convertible bonds, or preferred stocks which might offer more potential for the future.''
Investors who do a good job of managing their self-directed IRAs this way may be financially comfortable and happy at retirement time -- whether 20 years down the road or five. But other investors who have taken the self-directed path may not find things so rosy.
Says Martin Greenburg, director of book publishing at Boardroom Books, who began diversifying his IRA accounts two years ago: ``My wife and I have not been so lucky. My $2,000 investment in a well-known fund is now worth $1,500. My wife's is now worth $1,300. It is a big loss of capital, but there is no way to bail out. Taking the loss is meaningless since you can't get tax advantages.
``So you have to take a ``Japanese view,'' he joked. ``What will this mean to me in 400cq years? In a way, it is like playing with Monopoly money. You can play with it, but you don't use it.''
But other investors with self-directed IRAs have fared better. ``I use two mutual funds, says Mara Slatkin, a copy editor and wife of a research scientist. ``One is a low-risk no-load fund, the other a higher risk. I found that the higher risk fund performed better and I have been using that one ever since.''
As IRAs get larger, it is evident that investors will opt for even more choices. ``We are seeing investors building mini-portfolios,'' says Merrill Lynch's Underwood. ``People thought of it at first as a tax deduction. But they are beginning to think of it as more -- more of an investment that should be diversified, and in the future that will become even more important.''