GREGOR RIESSER is not your typical individual retirement account holder. Five days a week the retired 65-year-old Shell research chemist sits in front of his home computer and portable stock quote machine to plot convertible arbitrage plays and other offbeat investments.

Not content with the plain bank CDS and mutual funds that get the bulk of IRA money, Riesser is one of a growing group of investors using self-directed IRAS to manage their retirement savings.

Adding nondeductible money to an IRA may not make sense now (see next story), but millions of Americans already have substantial amounts in established IRAs. Moreover, it's quite possible to build up a very large IRA from the rollover of lump sum pensions or 401(k) plans, paid out when an employee retires or changes jobs. For example, in 1986 Lowell Milken, brother of Michael, used his IRAs to take an astute $170,000 position in Beatrice takeover bonds, just before they went up in price. As their accounts grow, investors are switching from bank and mutual fund IRAS to self-directed IRAS that function like brokerage accounts. Since 1985 self-managed IRAS have grown from less than 15% of the $200 billion in IRA deposits to nearly 18% of today's $465 billion in IRAS.

Offered by brokerage houses, banks, mutual funds and insurance companies, self-directed IRAS allow virtually any type of investment except collectibles, insurance and leveraged investments (for example, stocks bought on margin). Among the holdings permitted by the Internal Revenue Service: Ginnie Mae mortgage pools, covered options, foreign securities and financial and commodity futures.

Riesser's self-directed IRA represents only $15,000 of his $500,000 retirement savings, so he decided to have a fling with it and opened a discount brokerage account at Fidelity Brokerage Services. This is where he does his most aggressive trading--betting on everything from proposed mergers to contrarian plays in companies on the verge of bankruptcy.

Example: In February Riesser made a hedged bet on Circle K, the Phoenix-based convenience store chain. He bought $12,000 (face value) Circle K 81/4s of 2005 convertible bonds for $2,580 and then hedged by buying October puts on 1,000 Circle K shares, exercisable at 5, for $2,750. Total outlay, after commissions: $5,777. Since then Circle K has gone Chapter 11, and Riesser has lost $750 more on the bonds than he's made on the puts. But he still expects to come out ahead, figuring the bonds will do well in the reorganization.

Riesser is also high on TWA'S 12s of 9.001, trading at 36 1/2. "They're still being treated like pay-in-kind bonds, even though they start paying cash in six months, so they're underpriced," he says. For as long as TWA avoids Chapter 11, the bonds yield 33%.

While Riesser can afford to gamble with his IRA, such tactics wouldn't make sense for someone with a small IRA and nothing else for retirement. Such people wouldn't have Uncle Sam to help them pay their losses. "Unless your entire portfolio is more than $250,000, you're probably better off sticking with the diversity and efficiency of no-load mutual funds," advises Wallace Head, director of Arthur Andersen & Co.'s personal financial planning practice.

Many investors simply lack the time and expertise to manage their own accounts. In October 1987 Albert Sherman of Boca Raton, Fla. returned from a vacation in Africa to discover that his $35,000 self-directed IRA had $11,000 in paper losses after the market crash. Sherman held on for a year, narrowing his loss to $3,500, then cashed in his stocks for a bank co yielding 10%.

But you don't have to be a gambler to benefit from self-directed accounts. Say you have $250,000 and a desire to stay in ultraconservative, government-guaranteed investments, such as Ginnie Maes and Treasury bonds. Owning them directly would save you the annual expense overhead of $1,000 or more built into a typical bond fund account of that size. You would, of course, incur commissions to establish your bond portfolio, offsetting some of the savings.

Brokerage houses are pursuing self-directed IRA business with gusto. With $44 billion in IRA brokerage accounts, Merrill Lynch has the largest chunk of IRA business. "Most of the money is coming through transfers from banks and thrifts with people telling us they want to manage their accounts more actively," says Don Underwood, head of Merrill's retirement plan services. In an effort to hook potential rollover accounts, Merrill is negotiating with Forbes 500s companies to offer retirement seminars on its self-directed IRAS.

The mutual fund industry has been quick to respond. Seven of the ten largest fund families, including Fidelity, Vanguard, Franklin and IDS, offer self-managed IRAS through brokerage affiliates. You can mix no-load funds with other securities in a single self-directed IRA at one of the no-load fund sponsors.

Full-service brokers such as Merrill Lynch usually offer the broadest choice of investments--from mutual funds, CDS, Treasurys, equities and corporate bonds all the way to American Eagle gold and silver coins. (These coins are among the rare exceptions to the IRS rule against collectibles.) Charles Schwab has lower commission rates than Merrill but can't handle an order for Ginnie Maes.

Do shop around. A recent survey by New York City-based Mercer, Inc. of the 150 largest discount brokers and banks with brokerage affiliates found that self-directed IRA setup and annual custodial charges typically range anywhere from nothing to $50. Commission fees can vary by $9,00 on a $10,000 trade.

Two points on setting up a self-directed IRA. One is that you generally have to set it up with cash. Say you have 500 shares of GM in your regular brokerage account and want to move it into your IRA as part of a rollover contribution of $200,000. You'll have to sell the GM, contribute all cash to the IRA, then use some of the cash to purchase other GM shares. Explain this to your broker. He should be willing to give you a reduced commission for the sale and repurchase of the shares.

The other caution has to do with rolling over a large profit-sharing distribution. If you already have a Keogh plan (something like an IRA, but available only for self-employment earnings), that's where the rollover should go. This can preserve desirable income-averaging provisions if you think income tax rates are headed higher and want to respond by taking a large chunk of money out of your tax-sheltered plans all at once.

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By Michael Fritz

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Source: Forbes, 6/25/90, Vol. 145 Issue 13, p206, 2p

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