Shopping for retirement funds

A reader plans to open a Roth IRA, but is unclear about what to watch out for. Our expert offers some guidance.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: I'm in the process of opening up a Roth IRA and a regular investment account. Am I better off working directly with a mutual fund company or should I open these accounts through my bank or local credit union? - Fane, Salt Lake City, Utah

Answer: Opening the accounts themselves should pretty much be a cinch no matter where you do it. The process is simple and the account maintenance fees, if any, are usually nominal.

The real issue is whether you feel confident enough about your knowledge of investing to choose the mutual funds that will go into your respective accounts.

Just to be clear, we're not talking rocket science here. To be a successful investor, you don't have to be able to pick the best funds around. Indeed, it's impossible to know what funds will perform the best in the future, so that's an unrealistic standard. All you really need to be able to do is choose funds that have a reasonable shot at solid performance. If you find funds that end up doing much better, great. But as long as your funds perform in line or maybe a bit better than their peers, you'll do fine.

So if you're comfortable enough to take on that task, I don't see any reason why you can't work by phone (or face to face if that's an option) with the representative of a no-load mutual fund firm, which is a company that doesn't charge sales commissions and sells its funds directly to the public. That could be one of the big companies like Fidelity, Vanguard, T. Rowe Price or American Century (just to name a few), or it could be one of the smaller no-load companies for that matter. (For a list of no-load companies, click here.)

Frankly, finding decent funds isn't all that hard and doesn't require that much work. You can start by reading our Money 101 lessons on Investing In Mutual Funds. While you're at it, read the lesson on Asset Allocation too since it will tell you how to combine funds into a coherent portfolio.

That done, you can start looking for funds you might invest in by checking out the Money 70, which is Money Magazine's list of elite recommended funds. You can narrow down the potential candidates even further by going to the index funds on the list.

Unlike regular mutual funds, whose managers attempt to outperform the market, index funds merely try to mirror the returns of the market or a particular market benchmark. That may sound like a recipe for mediocre performance. But because index funds have such low operating expenses, they usually end up beating the majority of actively managed funds over the long haul.

And if you want a truly simple-but in my opinion also effective-solution, you should check out the target retirement funds that made the cut for the Money 70. These funds give you a fully diversified portfolio of stocks and bonds that becomes more conservative (that is, heavier in bonds) as you age. They're the ultimate no-brainer fund, and a good choice for people who couldn't be bothered choosing among dozens of different funds (or who fear that they might end up sabotaging their investment strategy by chasing hot performers that are on the verge of flaming out). (For more on how these funds work, click here.)

One advantage of going this route is that all the money you have to invest will go into your accounts rather than to a fund sales consultant. Another advantage is that you'll have a better sense of control over your finances than if you simply delegate the task (although, admittedly, this advantage can quickly turn into a disadvantage if you're irresponsible in the way you handle your investments).

Still, if there mere thought of doing any of this makes your eyelids droop - or you just don't want to devote the time and energy to this sort of activity - then opening accounts at your local bank or credit union may be the better way to go for you.

You'll pay some sort of fee for the privilege of having the bank or credit union rep help you choose the funds. It might be an upfront "load" based on the amount you invest, typically 3 percent to 5.75 percent. Or there may be an extra fee known as a 12b-1 charge, which is used to pay marketing expenses and compensate sales people and is levied on top of the fund's usual management fee and other expenses. (In some funds, you may also pay a fee if you sell within the first five or so years of buying the fund.)

But one this is sure: if an adviser or sales person of any sort is helping you pick the funds, one way or another that person has got to be paid and one way or another that compensation is going to be reflected in the fund's expenses.

I have no problem with paying people for their work. The question is whether you're getting good advice. In a best case scenario, you'll be dealing with a fund representative who's knowledgeable about the various fund options and will make reasonable recommendations based on your needs. In a worst case scenario, you could get someone whose knowledge of funds and investing is skimpy and who's more interested in making the biggest possible commission than determining which funds work best for you.

It's sometimes hard to tell which sort you're dealing with (they don't wear signs saying "Competent" or "Inept" or "Trustworthy" or "Deceitful"), so you should be sure to ask plenty of questions: Why this fund rather than another one? How much am I paying in sales commissions and ongoing fund expenses? Is there a less expensive alternative available? And, of course, it's always a good idea to visit a few places - another bank, a credit union, maybe a local brokerage firm - and compare the recommendations.

So either way, you're going to have to do a little research. It's up to you to decide which type you'd rather undertake. But if you put a reasonable amount of thought into it, and a bit of effort, you should make out nicely - and you'll certainly do a lot better than if you had not saved or invested at all.

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