START Savings Plan Isn’t What Mom Had in Mind

Remember when your mother said you couldn’t save by spending? Well now you can, according to a company called START, for “Spend Today and Retire Tomorrow.”

START, an insurance agency based in Herndon, Va., has teamed up with retail and consumer products companies such as Spiegel, MCI, Eddie Bauer, Club Med and Hertz. These companies have pledged to contribute a percentage of participating customer’s purchases to savings accounts in their customer’s names.

How much you save depends on how much you spend, program officials say. Members receive a 1% contribution to their savings account for the first $1,000 of purchases, 3% on the next $1,000, and 6% on spending over $2,000.

There’s a one-time $25 enrollment fee. And once member accounts reach $100, they can have their money automatically transferred into a Metropolitan Life Insurance Co. annuity, which will allow the funds to grow on a tax-deferred basis.

START organizers say they dreamed up the program after realizing that Americans are worried about saving for retirement.

“The patented START savings plan is designed for the millions of Americans who find it difficult to save for tomorrow because they are spending money on everyday necessities,” START’s literature says.

Is it a good deal? Only if you’ve got stock in START.

To recoup your $25 “enrollment fee,” you’d have to spend $1,500 in the first year. That works out to 1% on the first $1,000 ($10), plus 3% of the next $500 ($15). Sure, you could spend that much on one Club Med vacation, but it only gets you to ground zero on the Start account.

If you spend $2,000 in the first year--taking the vacation, say, and buying all your Christmas gifts at Eddie Bauer--your net savings (after enrollment fee) are only $15.

START deposits that whopping sum in a Manufacturers Hanover trust account that pays no interest. Repeat: no interest.

If you want to withdraw your money, you get dinged for a 10% “processing fee,” dropping your $15 retirement account to $13.50--almost enough to buy the family dinner at McDonald’s.

Once you accumulate $100 in the account, you can transfer the funds into a Metropolitan Life insurance annuity that now pays 6.25% interest. (MetLife guarantees at least 3% interest annually for the life of the account.)

If money is taken out of the annuity during the first seven years, consumers will pay a “surrender fee” that starts out at 7% but decreases by 1% per year. In addition, if annuitants withdraw their money before they’re 59 1/2, they may have to pay a 10% tax penalty. And finally, if your annuity account is less than $2,000 and you haven’t contributed to it for at least 36 months, MetLife can cancel it, sending you a check, which might trigger all or some of those hefty penalties.

How much do you have to spend to save $100? If you do all the buying in one year, a mere $3,000, says Larry Andreini, START’s chairman. And that’s not including the enrollment fee. But if you spread the purchases out over many years, you may have to spend as much as $10,000. The reason: The contributions are based not on cumulative spending but on a single year of expenditure. In other words, if you spend less than $1,000 with participating merchants each year, you’ll never get more than a 1% contribution.

Nevertheless, Andreini maintains that it’s free money, since it was given to you at no extra charge when you bought life’s “necessities”--or at least things you would be buying anyway. “This will help you save painlessly,” he says.

In reality, however, there is not a “necessity” company on START’s list of 11 participating merchants. The merchants are GE Capital, a car-leasing firm, GE Appliances, MCI, Hertz, USTravel, Club Med, Spiegel, Eddie Bauer, Right Start Catalog (children’s goods), Red Rose Collection (gifts) and Catalist, which markets self-help books. So far, there are no supermarkets or discount stores or gas stations.

For now, the bottom line is whether or not you want to spend $10,000 to save $100. If so, you should worry about retirement.

The moral of this story: Listen to your mother.