Q. My employer offers a Simple IRA. They match the first 3 percent. This is great, but the only fund company they are offering is John Hancock Funds, with class A, B, or C shares, and horrendous yearly expenses. Should I invest anyway to get the match, or leave it alone and invest in a Roth on my own? All of my other retirement funds are with no-load, low-cost mutual funds. It irritates me to pay the loads!

--- DR, New Mexico

  

A. Welcome to the world of small 401(k) plans. They are frequently burdened with heavy expenses. Yours is no exception. If your employer didn't offer a matching contribution, your idea of investing in a Roth (or traditional IRA) on your own would be the best course of action.

But your employer is providing a match. It more than offsets the high expenses of the plan. You can understand this by working through a rough example.

Suppose your salary is $60,000 and you commit 3 percent to the Simple IRA. That means you'll put $1,800 aside. Your employer will add $1,800, for a total of $3,600. The match is like an automatic 100 percent return on your investment.

The Hancock "A" shares have a 5 percent load. This means the initial investment of $3,600 will be reduced by $180. So you've still got your $1,800 invested plus $1620 of your employers match. In effect, the commission reduces your employer match to 90 percent of the first 3 percent of your salary. That's not something to pass up.

Finally, fund expense ratios vary quite a bit. Choose Hancock "B" shares and it's likely to cost you 2 percent a year for an equity fund. But if you use their "A" shares the expense ratio will be more reasonable. Hancock Classic Value A shares, for instance, has an annual expense ratio of 1.25 percent and a 5 star rating from Morningstar. Over the last 5 years the fund has been in the top 1 percent of all large cap value funds. Hancock U.S. Global Leaders A shares, another 5 star fund, invests in large cap growth stocks, has an expense ratio of 1.27 percent, and has been in the top 17 percent of its category for the last 5 years.

Sadly, John Hancock is a pretty mediocre group. You won't find a lot of wonderful options in their mix of 135 funds. I suggest you capture the match with a 3 percent of salary contribution and hope that the funds with good track records continue to perform. As long as there is a substantial match, you'll be ahead of the game.

Unfortunately, saving 3 percent of your salary with an employer match won't accumulate to enough to retire on. If you also invested in a Roth IRA you could invest in low cost funds and hedge your risk of retiring to a higher tax bracket at the same time. While this will only affect a minority of workers, it will affect an increasing proportion of all workers over the next 10 to 40 years.

  

Q. I retired in 2002. My retirement income will stabilize in 2004 with two defined benefit pensions and Social Security. My wife and I also have retirement funds in both traditional and Roth IRAs (I rolled my 401(k) to a Traditional IRA). I am considering moving the traditional IRA funds to Roth IRA accounts, each year, to the extent I can without changing our income tax bracket. I believe Roth IRA accounts will provide more retirement flexibility, as we get older. What are the advantages/disadvantages of this idea?

---S.G., by e-mail

  

A. Here's where a good financial planner can be a lot more useful than a newspaper columnist. I can tell you that doing a Roth conversion on some of your traditional IRA account assets is a good idea in principle. It gives you a hedge against higher future tax rates, it may help you avoid (or reduce) the taxation of your Social Security benefits, and it will give you greater flexibility as you get older because you won't have to deal with Required Minimum Distributions starting at age 70  ½.

A good financial planner, however, will be able to tell you if the principle translates into actions that will benefit your particular situation. It may. It may not. It depends on the size of your pension income.