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Mutual Funds

Chunk of nation’s wealth sitting underused in IRAs

BOSTON — When it comes to retirement planning, most of the focus is placed on 401(k)s. The reality is that individual retirement accounts represent the largest share of America’s savings.

Many IRA holders are left to their own devices to manage their accounts. Of course, some investors are take-charge types with the ability to maximize savings without taking on too much risk. But in many other instances, portfolio management is hit-or-miss, with little attention to selecting an appropriate mix of mutual funds or other investments.

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IRAs provide individuals not covered by workplace retirement plans with an opportunity to save on a tax-advantaged basis on their own. The money put into a traditional IRA can be deducted from the accountholder’s taxable income for that year, and the money isn’t taxed until it’s withdrawn at retirement. Also, workers who are leaving jobs can use IRAs to preserve the tax benefits that employer-sponsored plans offer.

With so many IRA holders managing accounts on their own, approaches vary widely, often to the detriment of long-term savings.

For example, surveys by the fund industry’s trade organization, the Investment Company Institute, found that low-yielding money-market mutual funds make up a far larger proportion of IRA portfolios than is typically considered appropriate.

Perhaps even more surprising, IRAs held by people in their 20s had an average 22 percent in money funds.

Money funds are often a default investment for small rollovers into IRAs from other investment accounts, and IRA holders may be more likely than other investors to keep invested savings readily available for conversion to cash.

David Schehr, who follows investment industry trends for research firm Gartner Inc., says it appears that people ‘‘are a little better at investing for the long-term with their 401(k)s than they are with their IRAs.’’

He believes there’s a growing need for products to help IRA owners manage accounts on their own. Among the start-up firms that have launched in recent years to address this need are online-based services such as Wealthfront, ShareBuilder, Betterment, and Motif Investing.

The latest entrant into this niche is Rebalance IRA, which launched in January. Its advisory board includes Burton Malkiel, a Princeton University economist and author of the investing classic, ‘‘A Random Walk Down Wall Street”; and Charles Ellis, founder of the investment consultancy Greenwich Associates and author of another renowned investing book, ‘‘Winning the Loser’s Game.’’ Both are advocates of low-cost index mutual funds and exchange-traded funds, which seek to match market performance rather than beat it.

Customers can set up portfolios invested exclusively in ETFs, after a free phone consultation with Rebalance IRA’s professional financial advisers to assess their goals and existing investment accounts. Initial calls usually last around an hour.

The service includes automatic portfolio rebalancing to help IRA holders become more disciplined investors.

‘‘Rebalancing makes you do the opposite of what your emotions tell you to do,” Malkiel says.

He cited findings that systematic rebalancing over the last 15 years added 1.5 percentage points to an average annual return of a portfolio invested in stocks and bonds, while reducing volatility.

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