NEW YORK -- Here's a tip on how to lose money for retirement. Yes, I said "lose" rather than "make." So many investors are falling in love with this strategy that I thought I ought to tell you more.
It involves independent pension administrators who do the accounting for Individual Retirement Accounts, Keogh plans and other tax-deferred retirement accounts.
Absolutely anyone can enter this business. Pension administrators handle hundreds of millions of dollars, yet it's an unregulated field. They don't have to be licensed or audited; they don't have to file financial reports. And they deal with people who won't be looking for their money for 20 or 30 years.
"That makes it a breeding ground for people who want to launch a fraud," says Lisa Gok, assistant regional director for enforcement at the Securities and Exchange Commission in Los Angeles.
To fall into their hands, you must first conclude that you're not earning nearly enough in your tax-deferred IRA or Keogh.
You've probably been keeping that money in bank CDs or at a mutual-fund group. You decide to shift into what's called a "self-directed" account. That lets you buy a wide variety of investments, including stocks and real estate.
But, instead of choosing a well-established firm for your self-directed account, you switch to a small pension administrator. (By law, you need an administrator to make the transactions for your retirement fund. You lose your tax deferral if you do it yourself.)
Some administrators do an admirable job. But others attract business by promoting unusual and illiquid investments. Illiquid means that they can't be sold in a hurry: things like real estate, jukebox deals, technology partnerships and ostrich breeding. The touted investments promise -- and may initially pay -- higher returns than you can get from anything else.
Your risk is that the investments may be fraudulent or overhyped. When the scheme unravels, your administrator may go broke, or go to Brazil, taking your retirement money along. Two recent sad stories:
* Qualified Pensions Inc., with offices in Glendale, Calif., and Scottsdale, Ariz., and its owner Jerry Allison, attracted some $270 million from more than 14,500 investors. Around $72 million of that money was invested in wireless cable deals. The SEC alleges that many of those deals were either fraudulent, unregistered or both. QPI is now in receivership. Investors face substantial losses.
* First Pension Corp. in Irvine, Calif., turned out to be selling fraudulent real estate partnerships. Its three principals also pulled money out of its investors' accounts at custodial banks -- and this kind of loss isn't covered by federal deposit insurance.
How can you avoid disasters like these? The best way is to keep your retirement account with large, well-known pension administrators: banks, trust companies, mutual funds, insurance companies and full-service or discount brokerage houses. They're all regulated by various government entities.
If you specifically want a self-directed IRA, look for a firm that will let you buy and sell a wide range of securities, including stocks, bonds and no-load (no sales charge) mutual funds. Generally, that means a trust company or a discount brokerage firm like Charles Schwab.
To hold real estate in your IRA, however, you may have to use an unregulated, independent administrator.