Dear Mr. Berko:

I’ve got to cash out early. I’m 55, can’t stand my job and my new 38-year-old boss is not a nice person. I have $442,000 in my self-directed 401(k), thanks to two mutual fund recommendations you made (T. Rowe Price Capital Appreciation and Dodge & Cox Stock) in 1996.

Now I will change this account to an Individual Retirement Account and must get a guaranteed income of at least $16,000 a year from this money. I can’t afford any risks, and must to be able to get all my $442,000 back within a week or so if I need it.

I cannot buy certificates of deposit, because they are only insured to $100,000. A broker has recommended his firm’s own mutual fund, which owns government bonds. He said that it pays 6.4 percent and that both the income and principal are 100 percent guaranteed by the U.S. Treasury. Do you think this is the best investment for me?

S.O., Moline, Ill.

Dear S.O.:

Do you know that those mutual funds you purchased in 1996 are no-load mutual funds? In other words, you did not have to pay a huge upfront fee of 5 percent to buy them. Do you know that when you purchase your broker’s government bond fund, you are paying an incredibly ridiculous and unnecessary 5 percent, or $22,000? Do you know that if you have to sell that government bond fund next week or next month, you’ll lose an immediate $22,000?

I’ll wager a dime to a double lobotomy your broker failed to tell you about that. I’ll bet he also failed to tell you that the income from this government bond fund is not guaranteed and that over the past 10 years this fund’s income has declined from 60 cents a month to 36 cents a month.

I’m sure the broker very pointedly told you that all U.S. government bonds are guaranteed by the U.S. Treasury. I’m also sure the broker didn’t tell you that you are not insured against the loss in market value at any given time. So if the value of your government bond fund falls from $442,000 to $370,000 (which can easily happen), all you’re going to get back is $370,000 when you sell your shares.

No, I don’t like load mutual funds, especially those funds owned and managed by brokerage houses. One would reasonably believe that giant brokerages, all of which pay analysts huge salaries to attract the finest talent, would have the best mutual fund performance on the Street. However, the performances of most brokerage house funds look worse than dung on a dumpling.

Analysts employed by independent mutual funds are paid a pittance compared with those in the brokerage industry. Yet by comparison, the performances of most independent funds glitter like precious gems. Isn’t that amazing?

It has always amused me that the New York Stock Exchange can find a conflict of interest between two companies that make chopsticks but be blind to the obvious, odious conflict between a broker, his firm and the firm’s funds. It must have something to do with who gets paid!

The federal insurance limit on CDs in IRA accounts will rise to $250,000 in November. The Federal Deposit Insurance Corp., which insures bank accounts, and the National Credit Union Administration, which covers credit unions, will guarantee your principal. If your bank or credit union has a hiccup, there might be a few days’ delay, but 100 percent of your money is guaranteed 100 percent of the time.

For maximum principal protection, I recommend that you buy $221,000 in CDs in two banks. That way you just have to open two IRA accounts at two banks rather than five accounts at five banks. In this manner, your interest as well as your principal is 100 percent guaranteed.

However, the FDIC insurance limit remains at $100,000 for other CD and depository accounts until 2010. At that time, the FDIC and the NCUA will decide whether to increase that protection level to account for inflation and also might decide to increase the protection for IRA accounts.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service