Savers and investors are faced with lower and lower interest rates, and firms that can tout slightly higher rates are touting away - including mutual funds, brokers, and some banks. Sometimes, however, this leads to abuses: rates that can't be sustained more than a few weeks, or high returns that include the return of some principal.
Among the biggest offenders in the past year or so have been mutual funds, which invest in mortgage-backed certificates issued by the Government National Mortgage Association. As mortgage rates plunged, the air quickly leaked out of the inflated advertised yields of Ginnie Mae mutual funds.
Now, some order may be coming to the business of advertising mutual fund yields, including Ginnie Mae funds, bond funds, and stock funds. The Securities and Exchange Commission has issued a preliminary ruling that should set standards for how funds advertise and compute yields. The rule is not yet in effect; the public has until Dec. 22 to comment on it, and the SEC will take a few months after that to weigh those comments before coming out with a final rule.
In its present state, the rule would standardize the way funds compute yields used in advertisements and sales literature, says Thomas Harman, a staff member of the SEC's investment management division.
One part of the rule will require stated yields to reflect the dividends and interest earned during the previous 30-day or one-month period. This would keep funds from including a period several months ago when rates were much higher, or the very recent purchase of some high-yielding securities that are temporarily bolstering the average yield.
The ads would also have to show how various sales charges might affect the stated yield.
While funds might be able to use slightly different methods for coming up with a final yield figure, the exact method would have to be spelled out in the prospectus, Mr. Harman says.
Some of the problems that led to the proposed SEC rule have already been solved by the marketplace, notes L.Erick Kanter, spokesman for the Investment Company Institute, the mutual fund industry's trade association. Several parts of the SEC's proposed rule were based on suggestions from the institute.
``As a practical matter, we're seeing a lot less advertising of yield,'' Mr. Kanter says. Mainly, this is because even on Ginnie Mae funds, yields have fallen to single-digit levels.
Because of this, and because of complaints of artificially inflated yields, ads for Ginnie Mae and other funds that once said something like ``now yielding 10.89 percent'' have been altered to something like ``investors enjoy high current returns.''
Also, the new ads often include the fact that, as with all bond funds, the yield and share price will vary. This means any yield figure you may have seen in a previous ad, or anybody else's, can change very quickly, making this week's yield figure meaningless next week.
Perhaps the biggest misuse of language in ads for Ginnie Mae investments has been the words ``government guaranteed.'' True, the government does protect the Ginnie Mae investor against possible default by homeowners, but it does not guarantee the future market value or yield of Ginnie Maes, whether you buy them directly or through a mutual fund.
While government regulators are trying to correct part of the problem of overstated yields, another solution is coming more naturally. Many of the high-rate mortgages that were responsible for the inflated yields have been paid off, as homeowners quickly tired of making monthly payments on 14, 15, or 16 percent mortgages and refinanced into the 10, 11, or 12 percent variety.
With those high-rate mortgages wrung out of the system, actual Ginnie Mae bonds are now paying a more honest return in the 9 percent range. Ginnie Mae mutual funds are paying a percentage point or so less, but compared with the current interest rate environment, where one-year certificates of deposit at banks and savings and loans are paying just over 6 percent, Ginnie Mae funds aren't too bad.
But until the new SEC rule takes effect and until natural market forces make some corrections in the system, investors looking for high yields will still have to read mutual fund prospectuses and sales literature carefully.
Even after the rules become official, there may be differences in the way fund companies compute yields. So before sending in your money, read the prospectus to find out how the yield was figured and how long you might expect to receive payments from the fund. Correction:
In a recent column on the effect of tax reform on company-sponsored 401(k) and 403(b) retirement savings plans, we stated that if a worker is putting more than $2,000 into one of these plans, he or she could not have a fully deductible individual retirement account (IRA).
Fortunately for you, this is not true.
This ``linkage'' was part of earlier versions of tax reform, but in the final bill, the linkage, or offset, was removed. So, as long as you are under the income limits for having a deductible IRA, you will be able to put as much as you like into a 401(k) or 403(b), up to the new limits of $7,000 a year for the 401(k) and $9,500 for the 403(b).
As a practical matter, anyone who can afford to put $7,000 into a 401(k) probably isn't eligible for a deductible IRA, but the rules do mean that if you or your spouse is putting $3,000 or $4,000 into a 401(k), for example, you can still put some money in an IRA.
And even if your income is over the limit for having a fully deductible IRA, you can still have nondeductible IRA which will earn interest and compound tax-free until retirement.
For married couples, IRAs are fully deductible for adjusted gross incomes under $40,000, partially deductible between $40,000 and $50,000, and not deductible at all over $50,000. For singles, the deductibility fades away for adjusted gross incomes between $25,000 and $35,000.
If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.