Problems in Transferring IRAs Bring Disclosure Warnings from Regulators

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Problems in Transferring IRAs Bring Disclosure Warnings from Regulators

The recently ended individual retirement account season has highlighted a hidden problem for many investors: the inability to transfer holdings in certain investments from one IRA custodian to another.

Though the problems may seem secondary in light of the Senate Finance Committee's proposal to end the tax-deferred status of IRAs, the transfer problems are being examined by regulators.

Transfers enable customers to move their retirement account assets between financial institutions without losing the tax-deferred status of interest earned in the account, but some financial institutions refuse to make the transfers if the funds are held in proprietary mutual funds or master CDs.

Master CDs are instruments held in the name of a brokerage firm or bank and sold in pieces to investors, often as zero-coupon certificates.

Tax laws and other regulations allow retirement account transfers, but there are provisions in the tax code that outline certain restrictions.

But if a transfer cannot be made, institutions are required to disclose the fact before investors make their retirement account contribution. Many investors, not to mention brokers at firms, have not been informed that master CD investments cannot be transferred--even in self-directed IRA accounts.

"The brokers are more involved in selling rather than understanding the underlying concepts [of transfers],' said Steven Meyer, partner at the accounting firm of Ernst & Whinney. "There are probably one or two people at the brokerage firms in New York that know anything about this.'

A Securities and Exchange Commission official said that the brokerage houses could face regulatory action for failing to disclose the transfer problem to investors.

"We have had several cases involving the transfer of IRA assets in proprietary mutual funds,' said Jonathan Katz, director of consumer affairs at the SEC in Washington.

Mr. Katz noted, though, that the transfer of proprietary mutual funds is possible. The problem is more one of prolonged delays. Since a change in ownership is involved, he said, "if there are any restrictions on what transfers can occur, it will come up.'

But industry representatives said proprietary mutual funds are not currently being transferred. …